Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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....Price History............................. 24 Figure 6: 1995 Retail Outlets by Province ............................................................................... 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) ............. 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)..............................................Price History ........... 34 Figure 15: Monthly Rack Prices: Selected Markets ..................................................... 70 Figure 37: Charlottetown .......... 29 Figure 9: Annual Gasoline Price (Cents per Litre) ...... Costs................................................................................................................................... 42 Figure 19: Pump Price ...................... Pump Price (nominal ¢/litre)................................. 40 Figure 18: 1995 Average "Blended" Pump Price ........................Regional & Urban Groupings..........Price History........................................................................................................................................................... 36 Figure 17: Study Market Methodology ................... 48 Figure 25: Outlet / Volume Relationship ...............................................8¢ Pump Price) .....................................................................................................................Price History........................................................................................... 63 Figure 34: Montreal .............................................................................................................................. 30 Figure 10: CPI Index Comparison .........Regular Unleaded ...................... Income.............. 46 Figure 23: Average Annual Throughput per Outlet.................................... 50 Figure 27: Victoria ............................................................................................... 71 MJ ERVIN & ASSOCIATES i ............. 69 Figure 36: Halifax ..................... 53 Figure 28: Vancouver .................................... 47 Figure 24: Outlet Volume vs........................................................................ 66 Figure 35: Saint John NB .................................. 58 Figure 32: Toronto ........................................ 24 Figure 5: Canadian Retail Outlet Population .............................. 57 Figure 31: Winnipeg .. ex-tax elements .....................................................................................................................................................................................................Price History ..................... 44 Figure 21: Gross Marketing Margin Elements ...... 62 Figure 33: Ottawa ............................................ 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) ............................... 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category....................................................Price History ................................................................Price History.......................................................... 33 Figure 13: Monthly Gross Marketing Margins............List of Figures Figure 1: Pump Price / Margin Model....... 35 Figure 16: Monthly Demand vs...................1988-1995 ......................................... 4 Figure 2: 1996 Average Prices/Margins ..........................Price History ......... 28 Figure 8: Outlet Representation by Service .......................................................................................Selected Goods & Services .............................................................Selected Centres ........................... 49 Figure 26: Outlet Revenues................................................................................. 25 Figure 7: Outlet Representation by Mode................ Gross Product Margin ...........Price History ..................Price History.......... 54 Figure 29: Calgary ............................................ 43 Figure 20: Ex-Tax Pump Price Elements .....Price History ......... 56 Figure 30: Regina ..............................................................................................tax............ 45 Figure 22: Petroleum Gross Product Margins .. 16 Figure 3: 1996 Average Regular Gasoline Margins (56.................

...................... 13 Table 2: Taxes on Regular Gasoline on December 31.................................................................................... 15 Table 3: Selected Study Markets ............................. 51 MJ ERVIN & ASSOCIATES ii ............................................. 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue........... 1996 .............List of Tables Table 1: Downstream Sales Channels ...............................................................

represented by crude. Price competition occurs at three distinct levels in this industry. forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada. 1996 Average Prices and Margins .6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.5 ¢ 0. rack. and the Canadian Petroleum Products Institute (CPPI). The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold. and a foundation for effective policy development. These prices are determined in a competitive marketplace. Natural Resources Canada (NRCan). dealer income.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada. This study.3 ¢ 28. and ex-tax pump prices. together with a separate review of the refining sector.1 ¢ 5. supplier costs and profitability.5 cents per litre on the sale of regular gasoline in a typical major urban market. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline.8 ¢ TAX 28. This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs.2 ¢ 24.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56.4 ¢ 19. the Canadian retail marketing sector realized an average gross product margin of 3. each with unique MJ ERVIN & ASSOCIATES iii . This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry.

are examples of ways in which outlet petroleum sales are augmented by other revenues. and declined by 10 cents per litre measured in constant dollars. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers.500 retail outlets were in operation in Canada in 1995. nine of the past ten years. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. the responsibility for deciding upon retail pump prices resides principally at the local dealer level. compared to about 22. well over half of all outlets in Canada operate as lessees or independents. car wash. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . Dealers have a variety of relationships with their supplier. While each of these marketing channels operates in a competitive environment. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. this study focuses on the retail gasoline sector.000 in 1989.dynamics. and accordingly. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. Approximately 16. demand and other competitive factors existing at the time. and the traditional automotive service bay. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. due to its prominence in the public and media domain. which potentially allow for reduced margins at the gasoline pump. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). Convenience store. From 1986 to 1995. The resultant margins are therefore a reflection of the state of product supply. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $).

From 1991 to 1996. Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases.crude) 5¢ Marketing Margin (retail . and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs.The “tax-included” nominal pump price increased over this same period. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. As a result of these trends. MJ ERVIN & ASSOCIATES v . This has both resulted in. both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump. and has been a result of several factors including: • • • improved refinery utilization and efficiency. as a consequence of refinery plant rationalization (closures) and a modest demand increase. however. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack .

rural markets. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. but also had significantly higher throughputs per outlet. and one by one. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. 19 markets representing a broad range of conditions. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. were selected for a detailed review of outlet economics. wholesale product cost and freight charges) were isolated from the pump price. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. A wide range of petroleum gross product margins were evident. With the participation of several CPPI member companies.Comparison of Canada. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. When petroleum gross product margins were compared to their corresponding outlet throughputs. MJ ERVIN & ASSOCIATES vi . This was integrated with selected NRCan price data. This provided for market-bymarket and regional comparisons of key competitiveness indicators. several “outside variables” (product taxes. That such a relationship should exist was not surprising. although this study provides an independent confirmation of this. With few exceptions. to derive 1995 average petroleum gross product margins for each of the 19 markets. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput.

• Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet.000 5. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer. brand advertising. These costs would include salaries of marketing representatives and management.000. revenues from ancillary operations (eg: convenience store. Consequently.6624 1.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool.000. and in major vs.000 6.000 2. not poor competition.962 R2 = 0. and his personal labour investment.000 3.. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. head office and regional office overheads.000. of which gross product margin and throughput are only two of several factors.000. corporate charity. smaller markets.000. an additional goal of this study was to undertake a comparison of outlet profitabilities. and/or distributed to shareholders. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region. This study showed that an average outlet net revenue in the 19-market study group was about $70.000. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. supplier profit: after the above costs are allocated.000. which reflects his investment in the outlet. etc. sales processing.000 Volume (litres) 4.6634Ln(x) + 76. the residual revenue is available as profit to be re-invested into retail operations.• Smaller markets performed as competitively as larger centres. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii .

were insufficient to cover outlet costs. respectively. 1. suppliers likely incurred a net loss on outlet operations in 1995.000 $250. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector.000) $(250. at 1995 prices. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural.000 $50.000 $200.000 vs. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations. by all objective measures available to this study. Although an objective measure of competitiveness is elusive.000 per year.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.000) $(200. after allowing for estimated dealer profit and supplier overhead. The Canadian retail petroleum products industry.000) $(300.000) $(100. for which this study had no specific data.000) $(350. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers.000) $(150. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector.$154. distant outlets are clearly higher than those associated with concentrated urban markets. Despite this difference. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii . but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets . Average Outlet Income (before marketing overhead costs) BC/PR $300.000 $150. $61.market study group. and that petroleum sales revenues alone.000 $100.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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if Canadian average pump prices were only one cent higher than they were in 1995. although this study provides comprehensive evidence of this. this industry sector would have realized profits of unprecedented proportions. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. Thus. assuming all other costs were unchanged. Thus. Outlet throughput is a key determinant of inter-market pump price differences. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. most outlets used in the 19-market study represent major integrated oil companies. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. these findings clearly show that pump price increases are ultimately linked not to increased profits. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). in the long term these fluctuations are likely more reflective of market restorations. serve as perhaps the most significant indicators of competitiveness in the downstream industry. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . 7. not excessive profits. and the associated industry initiatives which are ongoing in nature. When plotted against the margin-volume model. and in turn. regardless of size. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. Also. When these margins were compared to their corresponding outlet throughputs. despite the predisposition of many observers to use them as such. While these economics might appear to place this industry in a position of poor viability. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). Both the downward trend in margins. Thus. That such a relationship should exist was not surprising. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. Also. most markets.• • • improving production efficiency through refinery plant rationalizations (closures). based upon an assumed posted rack price. A wide range of petroleum gross product margins were evident within the 19market study group. Indeed. virtually all of the 19 study markets exhibited similar levels of competition. Industry profitability is extremely sensitive to very small changes in pump price. 8. Nevertheless. but to increases in underlying rack prices. crude costs. had petroleum margins which were commensurate with average outlet throughput for that market. although pump prices in some markets can fluctuate by several cents per litre in the course of a week.

thereby improving petroleum volumes and ancillary revenues at the remaining sites. which should. reducing the number of outlets may also reduce the number of competitors. the solution would be to encourage some dealers to exit the market. The costs of most consumer goods in smaller. In suggesting this approach however.product margins than larger markets. average pump prices were relatively high. 9. other factors exist which contribute to relatively high margins and prices. there are three points to consider: • • In very small markets. in order to build upon the findings in this study towards a full understanding of the dynamics at work. more isolated markets are generally higher than in larger centres. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. according to the margin-volume model. and this study showed that gasoline prices were no exception. reduce pump prices. The loss of employment represented by a station closure may be of some concern to smaller communities. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. While competitiveness in most smaller markets was shown to be as active as in larger centres. This created some economic pressure to sell product at a higher pump price. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. isolated markets face particular challenges: although found to be highly competitive.5 million fewer litres of gasoline than a group A (major centre) station. which could actually inhibit competition. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. Smaller. it would seem that if local government in smaller markets were interested in lowering pump prices. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). • • At first glance. MJ ERVIN & ASSOCIATES xiii . poor outlet throughputs were generally the predominant factor. A full-serve retail gasoline outlet typically employs 3-5 staff. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs.

The federal Competition Bureau for example. As these findings show. and the perceived effect on their markets. This competition then. and in turn. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. car wash. Charlottetown. is viewed as an agency which exists to the benefit of industry and consumer alike. has seen a decline in pump prices relative to other Canadian markets. Retail ancillary operations are a critical element of petroleum price competition. and as such. The historical record is clear however: since deregulating pump prices. will likely preserve a highly competitive petroleum market. Convenience store. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. sometimes below that of outlet operating costs. under the current PEI regulatory structure. is well beyond the scope of this study. as marketers find even more innovative ways to attract market share. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). depressed petroleum revenues. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. This study proposes rather. is both the cause and consequence of increased activity in ancillary operations. the degree of price competition in the retail petroleum has in effect. does not appear to benefit in consumer terms. MJ ERVIN & ASSOCIATES xiv . are an acceptable limitation on pure competition (Finding 8).10. that where a healthy competitive climate exists. and the traditional automotive service bay. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. possibly to the detriment of the consumer. as it does in the Canadian petroleum marketing sector. direct regulatory interventions may have an adverse effect on competitiveness. the Halifax market. Also. many national and local environmental regulations exist for good cause. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. characterized by narrow product margins and relatively flat pump prices. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. 11. and likely others in Nova Scotia.

1. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. along the lines of the model used in this study. in a simple format designed for consumers and legislators. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. A regular comprehensive competitiveness evaluation. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. 2. petroleum marketing competitiveness. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. not inhibit. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. using Canadian and foreign selected markets. margins and competitiveness factors. using Canadian and foreign selected markets. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Public perception measurement. Develop cooperative industry research into marketing sector competitiveness issues. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. and the converse image held in much of the public domain. and the nature of competitiveness influences. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. This should be in the form of a quarterly summary of price trends and related measurements. Improve public understanding and awareness of competition in the petroleum marketing sector. • • MJ ERVIN & ASSOCIATES xv . Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents.

by industry. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. using Canadian and foreign selected markets. MJ ERVIN & ASSOCIATES xvi . • * * * Better understanding of this industry. and issues/opportunities facing such markets. and regulators alike. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. and in particular. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. consumers. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. is vital if Canadians are to put in place the structures that truly meet their social and economic needs.

leading to more effective policies and reduced uncertainty for future investment. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector.to provide a sound database upon which more effective policy decisions can be made. . In 1995. and MJ Ervin & Associates was selected to undertake the “rack to retail”. and that issues and challenges be identified so that conclusions and recommendations can be made “.. and in comparison to the Canadian national average and nearby USA markets”. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry.to determine the key factors which drive competitiveness in specific markets. Project Objectives The working group established as the primary objective of this study “. ..to analyze the rack to retail market and the market structure for refined petroleum products. A working group represented by Natural Resources Canada (NRCan). the Canadian Petroleum Products Institute (CPPI). Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry.” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made. and a challenging array of potential environmental initiatives. and in the process. competitive pressures from US and offshore refiners.. and .Introduction Background Canada’s petroleum refining and marketing sectors. face a number of challenges: a poor public image. and Industry Canada was convened to undertake this project. which comprise the “downstream” oil industry.to better understand the competitive opportunities and challenges.” MJ ERVIN & ASSOCIATES 1 . region by region across Canada..... This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions.to draw comparisons with nearby USA markets.. or even communities within the same region. including a regional. or petroleum marketing portion of the study.. Specific purposes of this study would be: • • • • “. The SCF laid the foundation for supplementary studies. to name a few. more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump.to help the industry cope and to enhance competitiveness.. and regional differences which face the petroleum products retail industry...

undertaken as part of this project to: • make a more detailed examination of price.The study meets these objectives. Many of the findings in this report are presented in graphical form. due to the considerable data gathering difficulties that such an approach would entail. Supporting data to these charts can be found in Appendix II. The study does provide comparisons with US markets on a national level of detail. and in order to provide insights into the range of competitive dynamics that can exist. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. presents conclusions and recommendations which arise from the study findings. margins and demand patterns over the past several years. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. and the effect of competitiveness on each subsector. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. from which some important findings are made. Ultimately. Findings are stated in bold and are summarized in part E of this report. Part D: Selected Market Study presents the findings of a diverse 19-market study. and a foundation for effective policy development. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . • Part E: Conclusions and Recommendations summarizes the study findings and. in Appendix I. Unless otherwise stated. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. Part C: Historical Trend Analysis provides an overview of prices. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. Specific comparisons of specific Canadian and US consumer markets were not made. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). through a multi-faceted approach. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. or which have a specific meaning in the context of this report. It also relates consumer demand patterns to pump price fluctuations.

Natural Resources Canada. for their assistance... Suncor Inc. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). Imperial Oil Ltd. These included: Canadian Tire Petroleum. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. We gratefully acknowledge these companies. and provided critical guidance and feedback at several key stages in the process. Environment Canada. through Maureen Monaghan and Huguette Montcalm. and also participated in the steering committee. and Shell Canada. NRCan. and their 481 retail associates whose outlet data was used in our analysis. Petro-Canada. Petro-Canada. • • Several organizations participated in two key review sessions. Finally. MJ ERVIN & ASSOCIATES 3 . Consumers Association of Canada. CPPI.• Industry Canada. assisted in securing the support and participation of member companies in the selected markets phase of the study. Suncor Inc.. Shell Canada. chaired the steering committee. and Industry Canada. through Bob Clapp.. including Ultramar Canada. The Canadian Petroleum Products Institute. Ontario Ministry of Environment and Energy. Ministère des ressources naturelles du Québec. facilitated some of the data gathering needs of this study.

And. These relationships can be modeled. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. as they are in Figure 1. and serves to explain several factors that together determine retail gasoline prices at any given time. as this study shows. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases.which is used by many groups and individuals to assess the competitiveness of the petroleum industry.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. most Canadians relate to this industry in one specific way: as consumers. but simply. multifaceted industry. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. or taste. unlike many consumer products. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. the particular quality of gasoline which is of most interest to consumers is not its colour. It is this particular feature of petroleum products . principally of motor gasoline. Yet. its price. In fact. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 .price . texture.

The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors.or margin .Many of the terms introduced and explained in this section are used extensively throughout this study. an understanding of the term itself is necessary. (implying that the stated margin represents net income or “profit”). Before examining each of the model elements. any operating expenses must then be considered before making any determination of profits. Gross margin is simply the difference between two price points. margins are squeezed or expanded accordingly.from the total pump revenue. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product). While both perspectives are valid. Each margin is quantified by its defining prices. A consumer however. “competitive” may be synonymous with “viable”. these stakeholder revenues are derived from the revenue from the retail sale. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. each essentially taking a share1 . consumer perspective. evaluating competitiveness is therefore a partly subjective process. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard. it is important to define the term “margin”. gross margin represents revenue only. objective measurement for competitiveness. MJ ERVIN & ASSOCIATES 5 . While this term is often associated with the phrase “profit margin”. but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. this study’s use of the term relates to gross margin. From an industry perspective. this study examines competitiveness from the latter. and in fact inextricably related. is more likely to equate the term with “value for money”. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. So defined. Ultimately however.

improving efficiencies. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. More importantly. or in other words. represents a process by which prices are set. reducing costs..” Price Competition in the Oil Industry In order to assess competitiveness. this usually requires a reasonable number of competitors. a universally acceptable definition of competitiveness is elusive.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. in order to maintain some level of brand variety. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. Conditions for a competitive market can be deemed to exist when: • • more than one. provide some means for comparing the type and to some extent. is the only real option in the long term.. in the sense in which it is something in the public interest. The actions by business rivals place an upper limit on the prices a firm can charge for its products. it can frustrate communication and obscure analysis. competitors can either restore higher prices or reduce costs.” “. Competition can only be sustained therefore. Since a competitive market effectively limits the price option. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. Inevitably. 1986: “Competition may mean very different things to different people. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). and the entry of new competitors and new ideas. Price competition. and ideally many entities offer the same or similar products (brand variety). Simply put. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . as competitors seek to attract market share through lower prices. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. An effective functioning of markets also permits smaller competitors to expand if they meet the test. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. the result of price competition is reduced profit. the degree of competition within a market. To achieve this. Technological change and innovation are the large levers of competition in industry. and unless care is taken to use the word precisely. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors.Unlike many business or economic concepts. one must ask how marketers compete. Accordingly. if market conditions allow a sufficient number of players to remain profitably engaged.

Within the broad context of the oil industry. which in turn defines the margins. in rack markets. the “oil industry” consists of two distinct industries: the upstream industry. 1971). Given the commodity nature of petroleum products. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. In fact. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. MJ ERVIN & ASSOCIATES 7 . and the downstream industry. particularly in the crude (upstream) industry and refiner sector. and are beyond the scope of this study. Jerome McCarthy. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people.. New York. most Canadians relate more in terms of retail gasoline marketing. and in retail markets. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners.44 (1st Dec. the raw material from which gasoline is made. whose main activity is the exploration and development of crude oil. (Homewood. Ill. is false. whose main 1 E. It is also important to stress that the market ultimately sets rack and retail pump prices. The converse notion that the industry establishes a “should be” margin. A refiner in Toronto may well compete with a refiner in Buffalo. the most effective of these as a competitive tool is price. some organizations have operations in two or more of these markets. 4th Ed. Price. commonly known as the “marketing mix”1.the variables at their disposal. and as will become more evident in this study. so a brief description of these. Nevertheless. 1960) 2 Although distinct. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. Basic Marketing: A Managerial Approach. • Thus described. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. which in turn defines a proper market price. and Promotion.: Richard D. Place. and are generally known as integrated oil companies. The dynamics of upstream and refiner competition are major studies in themselves. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. competition in the crude and rack markets deserves some mention. the geographic scale of competition is an important consideration. or four P’s: Product. Irving. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. p.

from the exploration for potential crude or gas reserves. Crude oil is a commodity which is traded in a global marketplace. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. implying that it fluctuates. and in the open market structure that exists in Canada. and the delivery and sale of these products to the consumer. Canadian producers have virtually no influence over world crude prices. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. drilling. and transportation of crude oil to the refinery plant. our crude prices rise and fall according to price benchmarks established far beyond our own shores. Canadian producers must compete to sell their production to refiners. gasoline grade. as a minor contributor to the world crude supply. Infrastructure The upstream oil industry encompasses a broad range of operations. it is important to examine its relationship with its neighboring downstream industry. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. production.the raw material from which gasoline is made. consequently.activity is the refining of crude oil into petroleum products. Canadian producers are known as “price takers” rather than “price setters” of crude prices. Although this industry is not the focus of this study. its marketing operations). MJ ERVIN & ASSOCIATES 8 . that is to say. it is probably sufficient to say that. alongside major producing countries such as Saudi Arabia. and refinery production methods. rather than a fixed value. due to variables such as crude quality. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. in several commodities trading centres around the world. which finds and produces crude oil . Within the scope of this study. The upstream industry’s crude price is represented in Figure 1 as elastic. While this study focuses on the downstream industry (and in particular. which gives an accurate portrayal of month-to-month crude price fluctuations. In providing historical comparisons of crude to rack/pump prices. which it does on a continuous basis.

oil producers must explore for potential reserves. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. is the provincial government. manufactures a range of refined petroleum products including gasolines. and some attention to the refiner sector is therefore given here. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. was 19. put simply. its predominant feature is the plant facility which. day-to-day plant operations are cost-intensive. From this revenue. MJ ERVIN & ASSOCIATES 9 . and lubricants. involving energy. As is typical of many manufacturing organizations. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners.1 cents per litre. In addition. diesel. This sector acquires crude oil. and numerous safety and environmental safeguards. in the petroleum sector. and pay out royalties to the resource owner. As a general measure: Finding 2: 1996 average crude price. and marketers who. is called the refinery. crude is only one of several factors that influence pump prices. drill for. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. and from this feedstock. as a factor of the regular gasoline retail pump price. heating fuels. which in oil producing provinces such as Alberta. and hopefully realize some production. A modern refinery is a sophisticated work of engineering. The focus of this study is on the marketing sector of the downstream petroleum industry. buy refined products from the refiner and sell them to the end-use customer.While some suggest that the price of gasoline should rise and fall exactly with the crude price. who manufacture petroleum products from crude oil. or roughly 34 percent of the pump price. maintenance. personnel.

The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. they use rack price as their basis. While refineries are always rack price points. not the refiner sector. 1 Dealer Price is not included here. If for example. In simple terms. this model only uses the benchmark crude value. some clear competitiveness indicators exist. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. since the market-driven rack price provides an objective.this is the “internal” price charged by a refiner to the marketing arm of the same company.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. Of these three refiner prices. This margin provides for plant operating costs as described above. reflecting the cost of transporting the crude from the producing region to the refinery plant. only rack price information is readily available in the public domain. there would be little or no market-driven competitiveness in the refiner sector. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. Wholesale volume data is not readily available on a market-specific basis. and a return on the considerable capital investment in the plant facility. which can be broadly categorized as follows1: • • • rack price . which may cause Gross Refiner Margin to be slightly overstated. 2 MJ ERVIN & ASSOCIATES 10 . Although contract and transfer prices are distinct from rack price. and accordingly. refiners sell their product under a variety of arrangements. which provides an independent and objective determination of rack-based gross refiner margin.Price/Margin Model Elements For simplicity. On a national basis however. the relative competitive strength of any given rack market is difficult to assess. transfer price .the price charged for immediate supply on an “as available” basis. but with no material effect upon the Gross Product Margin derivation. In fact. confidential terms between the seller and specific buyers. external measurement of the current market value of a particular petroleum product. indicative of a competitive wholesale rack market. Contract and transfer prices are not openly shared. Since both crude and rack prices fluctuate according to market forces. For a competitive rack market to exist. representing major Canadian population centres. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. as this price point exists within the marketing sector. less the price at which it bought its raw material2 (rack price minus crude price). contract price . as they relate to negotiated. many of which do not have integral refineries. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. In fact the refiner typically pays a higher price than the benchmark crude price. the gross refiner margin is elastic. The existence of rack price in a given market is not of itself. For simplicity. being squeezed or expanded between these two price points. the gross refiner margin is the price at which the refiner sells its refined product.

market-driven Rack (wholesale) pricing of petroleum products. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). as there is no obvious market mechanism to regulate its setting. Integrated Refiner-Marketers In Canada. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price.000 km) for overland truck transport. potential sources of wholesale product supply for most Canadian non-refiner marketers. the question of the internal selling price. wholesale refined product is bought and sold across very large distances. and which supply petroleum to about one-third of all retail outlets in Canada1. petrochemical producers. but where pipeline or marine fuel terminal facilities exist. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. for example. to major industrial consumers. would produce better than expected refiner income. In examining the structure of the Canadian refiner sector. In practical terms. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. As shown in Figure 15 (page 35). integrated refiner-marketers establish transfer prices at. who compete for a share of this demand. who themselves do not refine petroleum products. in order to maintain realistic accountabilities within each of the two sub-sectors. In practice. but with their US and European counterparts. from any one of several regional refiners. most refiners also participate in the marketing and retailing of petroleum products. but at the expense of marketing income. In these cases of so-called “integrated” refiner-marketers.for example.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . Canadian refiners must therefore be price competitive not only with each other. many US and European refineries are in practice. 1 Based on Octane Magazine Retail Outlet Survey data. arises. MJ ERVIN & ASSOCIATES 11 . and in the case of gasoline. even overseas. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. or close to. market-driven rack prices. The mechanisms that drive rack prices are more fully discussed on page 36. this limits a marketer to a relatively short range (perhaps 1. due to the relatively small transportation cost. to so-called “independent” petroleum marketers. or transfer price. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market.

in the minds of many consumers. and purchase at or near the established rack price. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. as a popular and relevant “window” on the petroleum marketing sector. or in the case of cardlock facilities. principally into commercial trucking operators’ vehicles. It is this sector which has direct contact with the petroleum consumer and it is this sector. which “sets” the retail price of gasoline. trucking. and aviation. product is sold from a central facility. Retail Sales to the domestic motorist. farming. each with its own distinct infrastructure. • • MJ ERVIN & ASSOCIATES 12 . Within this industry sector. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. including mining. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. the most recognized element of the downstream oil industry. and who essentially deal directly with the refiner. Wholesale Sales to a wide variety of customers. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. gasoline price and competitiveness issues attract considerable public. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. Marketing operations within this sector can be broadly classified into three elements. For this reason. home heating. media and regulatory attention.

There are over 1. Sales to non-refiner petroleum marketers.500 retail gasoline outlets in Canada. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. These outlets usually have considerable inventory capacity. There are over 850 cardlock outlets in Canada. Sales of petroleum products through bulk sales outlets. according to the contractual relationship between the supplier and the dealer. In major centres dedicated Home Heat centres provide this service. and regular gasoline in particular. and usually supply customers by delivery to the customer’s own storage tank. Direct sales generally do not involve any marketing sector infrastructure. Sales to major industrial accounts. in smaller centres. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. to the aviation fuel consumer. Retail outlets are operated in a variety of modes. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. usually involving some aspect of the marketing sector infrastructure. to the motorist consumer. typically at the “rack point”. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. Sales to spot buyers at posted rack price. Sales of aviation fuels at major and secondary airports across Canada. Sales of home heating fuels to residential furnace oil customers. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. by delivery tank truck. at a negotiated contract price. often delivered by pipeline or ship/barge. which is generally less than the rack price. MJ ERVIN & ASSOCIATES 13 . for example. Sales to commercial and industrial accounts by the wholesale marketing sector. There are about 16.300 bulk sales outlets in Canada. using delivery tank trucks.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. as principal elements of petroleum marketing operations. which primarily serve long-disttance truckers and commercial delivery and haulage operators. Sales of petroleum products (principally gasoline) through retail gasoline outlets. such as product transport and/or storage. as discussed. one final element of the pump price model must be reviewed. heating fuel delivery is an integral part of a bulk sales outlet. Before examining this sector in detail.

As part C of this study shows. the tax content of retail gasoline in Canada has increased steadily over several years. 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues. Table 2 shows the provincial tax content for retail gasoline. and seven percent GST. The petroleum industry acts as a collector of these taxes. PST). A three-cent drop in pump price. for example. typically made up of: • • • • a ten cent per litre federal excise tax. or roughly 50 per cent of the pump price. regardless of market conditions.2 cent (0.6 cents per litre (Canada 1996 10-city average). If the pump price decreases for example. would include a roughly 0. which amount to 28. provincial sales tax. 1 Due to the application of GST (and in Quebec. stable amount. tax content does fluctuate somewhat with pump price changes. MJ ERVIN & ASSOCIATES 14 . this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1. municipal taxes. the tax content of the petroleum price is essentially a pre-determined.3 in Quebec) drop in the tax content. in a small number of markets.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin.

0 10.1 25.5 3.0 10.2 24.0 14. plus a 6.5 cents and 4.2 cent per litre pump tax.0 27.7 3.0 cents is charged in the greater Victoria and Vancouver areas respectively.Table 2: Taxes on Regular Gasoline on December 31. All Quebec gasoline sales are subject to a 15.0 10.3 27.5 12.6 3.0 10.5 6.8 note 1 note 2 An additional tax of 1.3 Federal Excise Tax 10. An additional pump tax of 1.3 10.6 25.0 10. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.0 3.0 28.7 13.2 10.4 3.7 18.8 4.0 16.0 3.5 Total Tax 24.0 10.0 4.0 GST content (7% of pump) 3.5 14.0 10. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.7 30.0 15. Provincial Tax 11.0 10.6 22.0 28.9 3.5 cents was introduced in the Montreal and surrounding area in 1996.5% sales tax applied to the GST-inclusive pump price.1 32.0 10.0 10.0 10.3 20.6 3.6 3.0 9.2 24. MJ ERVIN & ASSOCIATES 15 .0 10.6 3.0 11.

Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements. some profit return for the shareholder. Refiner operations realized 5.3 ¢ 28. the brand supplier’s costs. or 50. and the retail gasoline sub-sector in particular.2 ¢ 24.5 ¢ 0. Figure 2: 1996 Average Prices/Margins .3 cents per litre. It also provides an overview of the industry in terms of several infrastructure parameters.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56.8 ¢ TAX 28. including retail outlet distribution. and potentially. and ancillary operations. or 9 percent.3 percent of the average regular gasoline posted pump price. based on regular unleaded gasoline.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28. The residual. namely the dealer’s costs and income.4 ¢ 19. Upstream operations realized 19. 3. This 1 Prices and margins reflect a Canadian 10 city average. operating modes. this section provides a view of the Canadian petroleum marketing sector.6 cents per litre.5 cents per litre (after freight cost). MJ ERVIN & ASSOCIATES 16 . was available for product marketing operations. or 34 percent of the pump price.1 cents per litre. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average).1 ¢ 5. to derive a representative value for regular gasoline gross product margin in Canada.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry.

Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. is the second of two elements of the downstream oil industry. or “rack to retail” margin. the finished product (gasoline.3 cents per litre. See page 10 for further explanation. and is often out-sourced to third-party common carriers.5 cents per litre. Bloomberg rack price values were used as the assumed wholesale price. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. three key findings can be stated: Finding 4: Finding 5: In 1996. which in the case of retail gasoline. and rack price. as part C will describe. As the product leaves the refinery plant. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. Based on the 1996 data. is usually the gas station. is defined by the marketdriven price points of ex-tax pump price. Freight MJ ERVIN & ASSOCIATES 17 . It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. and is then transported to the retail outlet. was 5. this is seen as a “non-core” business. petroleum taxes accounted for 50. In 1996. for example) is sold/transferred at the current rack or transfer price. Both refiner and marketing margins have been in decline over the past several years. it falls into the domain of the marketing sector. In 1996. In referring to marketing margins and product margins. The gross marketing margin. The marketing sector then. and it is depicted in Figure 1 as a fixed cost element. Freight cost does not typically fluctuate. was 3. Although many petroleum marketers conduct their own freight operations.gross product margin represented 6 percent of the Canadian average regular gasoline pump price.3 percent of the average urban price of regular gasoline in Canada.

1¢ Tax 28. freight. as it excludes the “outside variables” of tax. together with gas station dealers. typical of any retail business. This is a particularly useful measurement in comparing retail gasoline markets.6¢ Refiner Operations 5. As represented in Figure 3.3¢ 3. petroleum marketers. and is therefore a poor comparative tool. • Product sales: Within this domain.costs are generally less than one-half cent per litre in most major Canadian cities. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 . but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. but at an average cost of over $200. Figure 3: 1996 Average Regular Gasoline Margins (56. storing and dispensing a product such as gasoline adds considerably to the operating cost.5 cents per litre in 1996. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products. Gross product margin is therefore defined as gross marketing margin less freight cost.8¢ Pump Price) Upstream Operations 19. Posted pump price includes all of these variables.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study.000 per outlet. an average gross product margin for regular gasoline in a major Canadian city was 3.5¢ Product Operations Freight 0. and upstream/refiner margins. Unlike most other retail enterprises however. incur a variety of costs. rural markets experience higher pump prices than do larger centres. which are typically close to a wholesale rack point. as it represents 80% of all retail gasoline sales. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL).

Price. In order to measure competitiveness. etc. page 24).).44 (1st Dec. as gas stations proliferated. competitive strategy of this type focuses heavily on selecting the best place. seasonal blends. Place Typically. and Promotion. 1 Diesel is another petroleum product sold at many retail outlets. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. 2 E. but most consumers view gasoline as a commodity. marketers have attempted with some success to differentiate their product offerings from other brands. A portion of the market certainly responds to this type of competitive strategy. Today. a number of factors preclude this type of strategy. RUL prices are therefore most often cited when relating historical price trends.retail gasoline sales respectively1. Irving. propane vs. Today. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. Price competition has forced marketers to optimize outlet revenue. Basic Marketing: A Managerial Approach. marketers compete for the consumer’s choice of transportation energy (for example. Place. will ultimately purchase based on price. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. expanded product/services offerings such as convenience items. rather than the most places. p. one must ask how marketers compete. Higher octane grades are more expensive than RUL. additives. gasoline). Environmental concerns and associated costs have dictated greater selectivity in developing new sites. it represents a very small percentage of total retail petroleum sales. Ill. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. competitive activity can be observed when a marketer alters one or more of the variables at their disposal. and the price difference between these grades and the RUL price is referred to as the grade differential. marketers compete to be represented in as many and/or the best locations as possible. or when comparing price levels between markets.. • Product In the past decade. Jerome McCarthy. commonly known as the “marketing mix2.: Richard D. and 9 cents per litre for premium gasoline. This study does not examine such a broad issue however. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. The grade differential varies somewhat from city to city. 1960) MJ ERVIN & ASSOCIATES 19 . Although revenue from this product is factored into the study market economics in Part D. (Homewood. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. 1971).” or four P’s: Product. and accordingly. Simply put. but in 1995 was typically 5 cents per litre for midgrade. 4th Ed.

• • • While examples of all of these indicators are abundantly in evidence. volatile prices . price has proven to be the most widely used competitive tool by gasoline marketers. and more importantly. uniform prices . low prices and/or margins. and due to the already slim margins available to marketers. their subsector margins. As such. this study examines the dynamics of price competition in considerable detail. Examples are: • prominently displayed prices . This study presents an extensive historical and comparative analysis of pump prices. volatile pricing manifests itself in the form of a price war (see below). and therefore “trades” within a relatively narrow price range. free item with purchase or special price item with purchase. gasoline is a commodity. Consequently. • Price In most markets. fluctuating pump prices are a significant indicator of robust competition among marketers.while uniform pump prices are sometimes cited as evidence of industry collusion.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. price clearly remains the predominant competitive tool used by Canadian gasoline marketers. is less clear. MJ ERVIN & ASSOCIATES 20 . Promotional activity seems to have decreased in the past few years. At its extreme. gasoline is viewed by consumers as a commodity uniform in quality and widely available. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. probably due to its relatively high cost. Examples of promotional competition are: • • • brand identity gasoline discount coupon. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next.contrary to some public perception. In this context. caused by price competition.• • closure of non-viable outlets. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. due to the largely commodity nature of petroleum product. Promotion In the gasoline retailing sub-sector. Establishing an objective measurement of price as a competitiveness indicator however.

are indicators of a competitive market. This is a misconception. Price Support In times of “normal” pump prices. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. for example). The effect of this upon the gross marketing margin is obvious: it is squeezed. competitors may not follow. since they too must restore their gross product margins to sustainable levels. the relationship between the supplier and dealer is generally as described on page 25. If the posted price increase is too high. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. and provide to the dealer what is commonly referred to as price support. one must adopt the perspectives of both consumers and competing. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. the supplier may temporarily intervene. in an attempt to gain market share. adjacent dealers. or even undercut the competitor’s lower price. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. or even less than. but to competitors. or when prices rise or fall apparently in unison. While this support may take one of several forms. since there is no “dealer margin”. or even being squeezed to zero . assuming that the rack price is unchanged. bypassing the higherpriced outlet. The other dealer has little choice but to quickly match. the effect on many consumers is immediate: they will drive into that station. 1 This does not occur at company operated or commission outlets. MJ ERVIN & ASSOCIATES 21 . To understand the phenomenon of uniform pump prices. Pump prices therefore tend to move uniformly within a very short time. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. its effect is to restore some measure of the dealer margin. If one dealer decides to reduce pump prices (by two cents. in order to maintain a reasonable market share. Whether through falling pump prices or rising rack prices. facilitated through street price signs. who then react quickly to the change. Pump price signs are an ubiquitous feature of the retail gasoline industry. obviously at the expense of the supplier margin. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. Finding 7: Price uniformity and price volatility. When this occurs. the wholesale rack price.where the ex-tax pump price is equal to. In the case of lessee or independent dealers however. competitors will likely match this price. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers.When pump prices are uniform.

A review of historical retail pump prices in the Halifax. In addition. or of direct government intervention in marketing. In addition. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. Following a year-long investigation. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. the petroleum marketing sector has been the subject of several inquiries at federal. is beyond this study’s scope. control over retail pump price effectively reverts to the supplier. provincial and even municipal levels. There are few current examples of direct government intervention in the pricing of petroleum products. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. These cases have largely involved local dealers and/or isolated incidents. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. An examination of the effect of the Competition Act. More recently. which is administered by the federal Competition Bureau (Industry Canada). in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. the Bureau found that there was no evidence to support these allegations1. and a brief discussion of this case appears in part D. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. While this study does not intend to undertake a detailed review of the effect of the Act. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. but reverts back to the dealer when the support arrangement is ceased. resulting in 9 convictions. however.Under the provisions of some price support mechanisms. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. 1997 MJ ERVIN & ASSOCIATES 22 .

sales of gasoline through the roughly 16. inhibit competition. entry into an attractive market. one can cite examples of regulatory obstacles to exit from the retail gasoline market. a competitive climate. It is important to acknowledge that many regulations affecting the retail gasoline industry. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). that is. As a product group however. This issue is discussed more fully in part D. Many smaller retail owner-operators. and at least some of this capital cost is regulatory compliance-driven. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. particularly in smaller population centres. accounts for about 37% of all refined petroleum demand in Canada. it is clear that government policy plays an important role in facilitating. higher pump prices. or incentive for.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. to some degree. These regulations clearly exist to the benefit of all. MJ ERVIN & ASSOCIATES 23 . promotes or limits market-driven pump prices. but exist to meet other important societal needs. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. exit from an non-viable market. it is the single largest one. Conversely.500 retail gasoline outlets across Canada. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. for safety and environmental protection. and consequently. as outlined above. accounting for roughly 88% of all gasoline demand. or incentive for. The high cost of building a modern retail gasoline outlet for example. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. or inhibiting. A practice. creates an obstacle to. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. is in part. in the form of standards for the decommissioning of retail petroleum sites. So defined. Retail gasoline sales. accounting for 41% of all petroleum demand. creating a need for higher margins. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. and is the single largest market for gasoline products.

3% Total Sales Volume: 84.Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6.7% Light/Heavy FuelOils 14.2% Asphalt/Coke 4.2% Other 0.it has no practical means to enumerate each and every outlet.7% Lube/Grease 1.6% Other Gasoline 4. This study provides an estimate of the actual retail outlet population.9% PetroChem Feedstocks 5. Figure 5: Canadian Retail Outlet Population .452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey. nor is there any federal or uniform provincial enumeration of retail gasoline outlets. This survey accounts only for major established retail networks . as shown in Figure 5.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 .2% Propane /Butane 2.9% Diesel Fuel 22.2% Retail Gasoline 37.

Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. Several possible relationships. controls the setting of the pump price. and the dealer. Distribution of these outlets by province (Figure 6. There are two main stakeholders involved in the marketing of retail gasoline: the supplier. exist between retail dealers and their suppliers. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. and all inventory and revenues belong to the supplier. as one might expect. The supplier. the retail outlet is owned and operated entirely by the product supplier.500 in 1995. as owner of the product.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. The principal dealer and attendants are salaried employees of the supplier. who holds initial title to the refined petroleum as it leaves the rack point. or modes. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . and usually owns the brand name seen at the retail outlet. who manages the day-to-day operations at the retail outlet.000 outlets in 1989.The estimated number of retail outlets in Canada has declined from 22. and this is of some importance with respect to the matter of prices and competition in this sector. to about 16. using Octane counts only) is roughly equivalent to population densities.

who pays all outlet operating costs. the supplier retains control of the retail pump price. The “dealer” is in essence. usually based on cents per litre of petroleum sales. Control of Pump Price Dealer Compensation supplier a commission from the supplier. an employee of the supplier supplier supplier typically the dealer. and pays them from his commission revenue. the outlet facilities and petroleum inventory is owned by the supplier. Since the supplier owns the petroleum product at this type of outlet. but the outlet operator (“dealer”) is compensated by a commission payment. based on pump sales volume.the entire gross product margin accrues to the brand supplier. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 . the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. The dealer in turn hires attendants.sub-component margins . supplier salary from supplier. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee.

This Dealer Price. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. not the supplier. and sells at the posted pump price. MJ ERVIN & ASSOCIATES 27 . unlike rack or pump prices. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. and sells at the posted pump price.product from the supplier at a “Dealer Wholesale” price. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. the retail facilities are owned by the dealer. and in turn resells to the motorist consumer at a higher pump price established by the lessee. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. The dealer pays most or all of the expenses associated with operating the outlet. dealer-established retail price. and has control over the retail pump price. This dealer margin is defined as the pump price (ex-tax). and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. and means of compensation supplier. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. less the Dealer (wholesale) Price charged by the brand supplier. The margin between these two prices is the dealer’s gross revenue. The margin between these two prices is the dealer’s gross revenue. since it is predicated on contractual arrangements between the dealer and the supplier. can vary considerably from one supplier to another.

Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. 1 Unless the dealer is under a price support arrangement (for instance. during a price war) as previously described. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. and fully two-thirds operate as lessees or independents. Petro-Canada. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. virtually none of the major integrated outlets are company operated. This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. who themselves establish pump prices. MJ ERVIN & ASSOCIATES 28 . It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. or Imperial Oil). The remainder represent one of over 50 different marketer organizations.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. some general figures are mentioned here. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. In addition.

In fact.5 million litres. Figure 8 depicts the Canadian representation of several key ancillary services. Improved outlet revenue from ancillary operations has caused. These improved outlet throughputs have provided for improved petroleum revenue potential. Based on a sampling of outlets surveyed in this study. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. reduced petroleum margins. more fully described in part C. these study findings show that this can vary widely from market to market. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. Most ancillary services are operated by the dealer/lessee.While an average outlet throughput may be in the order of 2. In effect.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. Many outlets have more than one ancillary offering: many “flagship” outlets for example. has had a profound effect on the retail gasoline marketing sector. average annual throughputs ranged from under 1 million litres in smaller population centres. feature both a large-area convenience food store and a modern car wash facility. Canadian throughputs have dramatically improved in the past several years . to over five million litres in major markets such as Toronto. and is a result of. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. ancillary service has had the consequence of subsidizing the pump price of gasoline. Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . which in part has led to a reduction in retail product margins.

Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. as can be seen in part D of this study. many utilize terms which are explained in part A. Unless noted. Regional and market-to-market comparisons are presented in greater detail in part D. would be somewhat higher. While some of the presented findings are selfexplanatory. As such. prices are for regular unleaded (RUL) gasoline. Since 1 Data is not regularly collected on smaller markets. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. This part examines broad trends in several areas. An “all markets” average. This shows that pump prices have increased in nominal terms. particularly around 1990. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. and with which the reader should be familiar. an examination of the specific historical record of gasoline prices is useful. mainly using Canada average values. MJ ERVIN & ASSOCIATES 30 . including smaller markets. when the Persian Gulf War caused crude prices to increase significantly. using a Canada 10city weighted (by provincial demand) average. Since rising prices are common to most consumer goods and services. the “Canada average” price reflects an average of urban markets only1.

It also depicts the associated margins. retail pump prices were about 7 cents less in 1995 than they were in 1986. Figure 10: CPI Index Comparison . In constant dollars. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. ex-tax equivalent prices. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. When compared to other consumer goods. nominal pump prices decreased. as in Figure 10. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. as defined in part A of this study. rack price. MJ ERVIN & ASSOCIATES 31 .1990. When pump prices are reduced by the amount of tax content. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. and relative crude cost. and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate).

which are defined by the price points. that is. the downstream industry operates on a “cost-plus” basis. In fact. then one might expect margins to be quite constant over time. If. Figure 12 shows that industry margins have not been constant over time. due to additional market factors which affect pump and rack prices at any given point in time. it simply passes on a fixed cost margin to determine the “correct” pump price. as the next section shows. Margin History While Figure 11 provides an indication of key price trends. which in turn. are principally a reflection of changes in the underlying price of crude oil. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. it is also useful to examine the behavior of margins. as might be suggested. and in fact have displayed a declining trend over the past six years. nor do rack prices exactly follow crude costs. the presence of these additional market factors have operated to the benefit of consumers. and the rise in the tax content. as shown in Figure 12. MJ ERVIN & ASSOCIATES 32 . the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. and have risen slightly since 1994. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. as Figure 11 shows. It is important to state that pump price changes do not occur in exact lock-step with rack prices.

and has been a result of. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. as local competitive factors act to self-regulate pump prices. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. which have both shown a consistent decline throughout the period 1991 to 1996. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . In particular. this upward trend is not attributable to “downstream” refiner or marketing sector margins.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. the actual fluctuation is much more pronounced than shown. several factors. the gross marketing margin can fluctuate quite significantly1. not weekly or daily data. MJ ERVIN & ASSOCIATES 33 .crude) 5¢ Marketing Margin (retail . A more thorough discussion of specific market factors for these and other centres appears in part D. since the chart is based on monthly averages. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. This shows that on a monthly basis. Finding 13: From 1991 to 1996. 1 In fact.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. compared to the Canadian average. The decline in refiner and marketing margins has both resulted in.

This shows that. is presented in Figure 14.Figure 13: Monthly Gross Marketing Margins. this is wholly attributable to the difference in taxation. A comparison of Canadian and US regular gasoline pump prices. for several years. Canadian pump prices have been roughly equal to. although Canadian pump prices in urban markets are clearly higher than in the US. if not all of the difference in pump prices between Canada and the US.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. On an ex-tax basis. This difference accounts for most. or even less than. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . US Price History The retail gasoline tax structure in Canada is vastly different than the US. with and without tax. US pump prices. resulting in significantly higher Canadian gasoline prices.

The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. This would be a useful area for further research. • Although this study shows that on an ex-tax basis.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. when compared on an ex-tax basis. and moving up or down more or less in unison. From this it can be seen that Canadian and US rack prices. trading at any given time within a relatively narrow (about 2 cents per litre) range. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. Canadian outlet throughputs (although likely still less than those of the US). have improved considerably. While these trends have also occurred in the US. RFG has not been introduced to Canadian markets. Prior to 1994. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. page 24) and somewhat increased demand. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . Figure 15 compares these values for selected Canadian and US centres over a period of several years. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. behave in a very similar fashion. as a result of outlet closures (see Figure 5. both a cause and an effect of improved throughputs and ancillary revenues as previously described. largely as a result of two factors: • Canadian marketing margins have decreased in this period. which is reflected in US average pump prices. Canadian ex-tax pump prices were historically somewhat higher than in the US. This is no longer the case however.

or indeed anywhere.000 34¢ 2. Price History Figure 16 shows the history of Canadian gasoline demand.000 1. the price tends to be bid upwards. and as would be expected in any commodities market under these conditions.000 24¢ 1. not only in a given market. as demand ebbs and inventory improves. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”. and falling in the latter half of each year.700. Gasoline demand exhibits a very regular seasonal pattern. but in fact across the North American continent (US demand follows a similar pattern).700. As non-refiner marketers attempt to secure a supply of this diminishing inventory.300. Demand vs.000 2. rising and falling closely in step with demand.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg. increasing significantly every spring.500. or sales.000 2. conditions begin to favour a “seller’s market”. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories.000 1. Pump Price (nominal ¢/litre) 3. albeit less distinct pattern.100. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense). compared to average ex-tax regular gasoline pump price for the same period. Gasoline price exhibits a similar. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 .900. and prices tend to fall. Figure 16: Monthly Demand vs. Simply put.000 2.000 2.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets. of motor gasolines from 1991 to 1996.100. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America. Yet in the latter half of each year. a “buyers market” develops.500.900.

competing to meet their own needs. MJ ERVIN & ASSOCIATES 37 . Figure 16 shows that from 1991 to 1995.3%. while average ex-tax pump price declined by 14% (since 1994. The traditional supply-demand model predicts that when demand rises. gasoline prices have not followed the traditional model. and product taxes which add to the consumer price of gasoline. This part of the study presented a number of historical views of retail gasoline prices. has operated in a highly competitive environment. pump prices have increased due to a significant rise in crude costs in this period). and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. On a long-term basis however. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. in that prices have fallen. which consists of the refiners and marketers of gasoline and other petroleum products. This is of course. All of the findings suggest that. as evidenced by declining industry margins. while world crude prices and Canadian taxes have generally increased over the past several years. the downstream petroleum industry. despite a rise in demand. the essence of a free market economy.Whether in the spring or the fall. which ensures a competitive product price for buyer and seller alike. so do prices. a feature of most marketregulated commerce. demand rose approximately 8. their related product costs and margins. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike.

etc. although one was subsequently dropped due to insufficient submitted data. and pump prices alone provide very little opportunity for “comparability”. play a role in a market’s pump price. is useful in providing broad overviews of industry price and margin trends.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. ancillary revenues.. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. • Methodology Selection of Markets A number of markets were selected for the study. outlet volumes. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. and a more detailed examination of price. MJ ERVIN & ASSOCIATES 38 . A number of factors such as taxes. there is no regular monitoring of pump prices in smaller centres. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. freight. Nineteen markets were therefore adopted for the study (Table 3). and in order to provide insights into the range of competitive dynamics that may exist. outlet costs. namely product margin. These “outside factors” tend to obscure the more relevant aspect of pump price. but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres.

Furthermore. and Canadian Tire Petroleum. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. the gross marketing 1 Although White Rock is clearly not a major centre by itself. retail pump prices . This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences. MJ ERVIN & ASSOCIATES 39 . Ontario. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. Petro-Canada. but a number of variables. To this end. In addition. Five companies responded to this request: Imperial Oil.000.are influenced not by one. price history data not available through public sources.Each market was classified according to regional affiliation (BC/Prairie. retail outlet and brand representation.. the gross marketing margin must be examined in isolation from those other variables. Process Overview As illustrated in part A. To examine the competitiveness of the marketing. it was essential to obtain data not normally available through existing public sources. these organizations provided market-level data on freight costs. Suncor Inc. In all.and consequently competitiveness . and for smaller markets. 2 Depending upon the outlet mode. and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. Shell Canada. or “rack to retail” sector.0001. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. and Group B markets less than 500.

2 Accordingly. a market-by-market profile of outlet income is presented. Using the derived gross product margins and volumes for each market. Where applicable. weighted by sales demand. The gross product margin thus serves as an interim basis for comparing study markets. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). and freight. including some smaller centres. and the final “rationalized” gross product margin was determined for each market. to arrive at “blended” values2. a broad representation of markets was possible. Finally. From participant company supplied data. by product grade. average outlet annual throughput was determined for each market. Group B (smaller market) and 19-market study averages.margin is stripped of its freight component. these were weighted by volume. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. MJ ERVIN & ASSOCIATES 40 . in addition to operating cost and ancillary revenue data gathered in the study1. rack price. 1 Although outlet cost and ancillary revenue data was not available for all markets. Where differences in gross product margin might still exist. This allows for an accurate determination of net outlet revenue. rack price. 2. and freight were successively removed from the pump price. For each market. Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. to derive the 1995 average gross product margin for each of the study markets. The variables of tax content. tax content. average pump prices are higher than actual average regular gasoline prices. 3. as the “blended” price includes other product grades. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. 1995 average values were determined for pump price. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists.

etc. 7. marketing margin. also considering that RUL constitutes the majority of product... and therefore where assumptions were made. freight. a recognized source of data on world crude oil and petroleum markets and prices. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain. A dollar-per-outlet estimate of these elements was made. These differentials do vary from one market to another. or consolidated net incomes. average revenues from ancillary services were added. and accordingly represent a broad spectrum of consumers and marketers.4. but they are relatively minor. In referring to marketing margins. represent a broad range of markets. and from one brand to another. This variation is constant across all nineteen markets however. grade differentials were based on known differentials of nearby markets. product margins. While clear. including relatively smaller ones such as Sioux Lookout or Gaspé. as described on page 10. and gross product margins are therefore likely to be understated. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. The derived weighted average values of pump price. accurate comparisons are possible. MJ ERVIN & ASSOCIATES 41 . many wholesale petroleum purchases are made at less than the “posted” rack price. encompassing a significant portion of the entire Canadian market. petroleum revenues. Also.. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. objective data exist for both of these values. so that on a cents-per-litre basis. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. Unlike retail pump prices however. and outlet operating costs were deducted from total revenue. This value was then applied to the gross product margin to determine average outlet petroleum revenue. When these margins are applied to outlet throughputs as in step 4 above. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. Interpretation of Data In some smaller centres. it is important to understand that the use of rack price in this analysis has certain implications. Wholesale refined product prices used in this study are therefore likely to be overstated. 5. perhaps by 1 to 2 cents per litre. 6. and supplier profit.7 million. the effect on the “blended price” is small.. From participant company data. these 19 markets represent a combined population base of 8. Supplier Overhead costs. Bloomberg rack price values were used as the assumed wholesale price..to determine average consolidated net revenue per outlet. .

8 cent difference in pump price 1 See footnote at Appendix II. broken into tax and extax components. while lower prices tended to prevail in major centres. higher priced markets are associated with smaller population centres. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. Tax Figure 19 shows posted pump prices for the study markets.64 cents per litre in pump price. A 6. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however. table J for an explanation of how variance is derived. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. MJ ERVIN & ASSOCIATES 42 . The data shows a statistical pump price variance of over 17 cents per litre within this study group. accurate. The first of these variables to be examined is tax.38 cents per litre in ex-tax pump price. but a variance of only 12. The study data suggests that variations in tax rates account for a significant part of pump price differences. independently gathered data. The 19-market study group exhibited a statistical variance1 of 17. there is little to suggest why such a high variance exists. and based on objective.Rack prices used in this study are nevertheless market-driven. The data also shows that typically.

MJ ERVIN & ASSOCIATES 43 . was less than three cents. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity.75 cents per litre (Vancouver. The data shows that taxation between markets within the same province varies little.less than one-half cent per litre. thus providing a better basis for comparison.between Calgary and Vancouver for example. GST content can vary by market. it is therefore more useful to use ex-tax pump prices when comparing any two markets. namely the upstream industry and refiner sector. while taxation between provinces is more pronounced . 1 Due to pump price differences.tax. additional elements of the revenue stream must be further isolated. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. Montreal). Upstream and Gross Refiner Margins Although the deduction of tax content is useful. taxes were a significant element of pump price. Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. In all study markets. provincial tax rates can vary greatly. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. as described in part A. when examined on an ex-tax basis. accounting for roughly half of the average retail price. or when examining historical price trends. Figure 19: Pump Price . This eliminates any effect that tax variability may have.while all markets are subject to the same rate of federal excise tax and GST1. but the variance is minimal .

but ultimately. the rack price is set at the rack point (Winnipeg. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. MJ ERVIN & ASSOCIATES Cents per litre 44 . rack and pump prices. This is due to the fact that for any market. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. Furthermore. differ little from those of major centres. Freight costs are additional. and their respective margins. as is examined below. To address this. Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. if a clear understanding is to be achieved. it should be restated that each of these sectors.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. as this would cause rack buyers to bring product in from the lower-priced region . the rack price is equivalent to the upstream margin plus the refiner’s margin. the validity of analyzing gross marketing margins in isolation might be raised. reflecting some differences in refinery crude acquisition costs. one region cannot maintain rack prices at a higher level than another. When rack price is deducted from the ex-tax pump price. are clearly delineated by market-driven crude. in the case of Thompson). The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. rack price) and gross marketing margin elements. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. reflecting the reality that at the rack level of competition.assuming transport costs did not outweigh the price difference. and therefore are best analyzed separately.

in fact. Before using this as an analytical tool however. particularly in comparisons of major urban markets to small. For markets which are also established as rack points. To provide a comparative view of the marketing dynamics within the study group.49 cents per litre (gross product margin). most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. Two of the study markets had freight costs in excess of 3. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13. the data shows that freight is often a significant part of the gross marketing margin.0 cents per litre. as low as 0. it is therefore important to eliminate the freight variable from the gross marketing margin. resulting in comparative gross product margins. one final outside variable must be isolated: that of product freight. remote population centres. MJ ERVIN & ASSOCIATES 45 . generally smaller markets.16 cents per litre (gross marketing margin) to 7.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. this freight cost is almost negligible.3 cents per litre. and therefore a significant pump price factor. Figure 21 shows a study market comparison of gross marketing margins. with their component freight costs. it is essentially a “non-core” business. Although freight operations are often an integral part of many petroleum marketing operations. For other. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply.

1995 gross product margin averaged 5.5 cent per litre average relates to regular gasoline in major markets. while Toronto.the gross revenue available to the petroleum marketing sector for its operations. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3.a variance of only 2. at 14.22 cents per litre Smaller markets showed a wider variance in gross product margin . at 3. while Group B markets averaged 7.06 cents per litre. Group A (larger population) markets averaged 5. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market.6 cents) to the variance in their component gross product margins (7. or between any two regions.5 cent variance in gross product margin is still significant however. For all study markets. as the 3. or consolidated net incomes. product margins. whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres.5 cents). was the highest of the study group.5 cents per litre average Gross Product Margin cited in Part B. The study revealed that: • • Retail gross product margins differ very little between major urban markets .68 cents per litre1. to the resultant retail gross product margin .6. In referring to marketing margins.17 cents per litre. Gaspé.95 cents per litre. A 7.68 cents per litre.42 cents per litre. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17. petroleum revenues. Bloomberg rack price values were used as the assumed wholesale price. was the lowest. MJ ERVIN & ASSOCIATES 46 .

000. A wide range of volume performance is evident.1 cents per litre in Toronto. for example.000 1. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow.differences between markets. ranging from under 700.000 Litres 3.000. To understand why such a wide range of margins can exist after eliminating all tax and freight variables. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group.000 2.2 cents per litre in Gaspé. 3.000 litres per year (Sioux Lookout) to over 5. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets. if any retail gasoline outlet located in the Toronto area for example.000 litres per year (Toronto). sold significantly less than 5 million litres of petroleum per year.000 5. Indeed.000.000. once isolating retail gross product margin from all of the “outside” pump price factors. If these two factors are related to each other as they are in Figure 24.000 4.000. Figure 23: Average Annual Throughput per Outlet 6. it would likely be so unprofitable as to be un-viable. a wide range of variability still exists between markets in the study group . a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 .14. vs. an examination of related outlet throughput volumes is necessary.000.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that.000.

Ontario.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes. Regionally.6634Ln(x) + 76.000.000.000.95 cents).000 6. compared to 2.000.4 million litres annually. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.7 million respectively.6624 1.000. Smaller markets perform as competitively as larger centres.000 5. all market groups (BC/Prairie. while those with high Gross Product Margins tend to have low outlet throughputs.000 2. it follows that higher gross product margins will be the consequence.962 R2 = 0. Although MJ ERVIN & ASSOCIATES 48 . On average however.Figure 24: Outlet Volume vs.that is.000. As most outlet operating cost are fixed in nature . the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5. If all outlets in a given market experience generally low throughputs. With few exceptions.000 Volume (litres) 4. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet.42 cents) than smaller (Group B) population centres (7.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin.000 3. not of poor competition. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. they remain essentially the same regardless of volume changes . the Group A market outlets had roughly 50% more throughput than Group B outlets .

and ultimately shows that very little difference in competitiveness exists between any two markets. and must be examined.000. Consolidated Net Revenue per Outlet To create a complete. and supplier MJ ERVIN & ASSOCIATES 49 . and auto service. however. as described below. in addition to petroleum sales. Figure 25: Outlet / Volume Relationship .000. supplier overhead costs.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). is only a measure of petroleum revenue per litre. These additional factors clearly have an effect on the relative competitiveness of retail markets. such as convenience stores. ancillary sales. and the resultant consolidated net revenue. and incur many expenses in the course of their commerce. In reality. less outlet costs. It represents the residual revenue which is available to the dealer and to the supplier. competitiveness occurs between retail outlets. averaged $69. while operating costs are those costs which are directly incurred in the operation of the retail facility. supplement their incomes with other revenues.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1.000 2.000 3. product cost.000 5.000. Gross product margin. which. Figure 26 summarizes total outlet petroleum sales. two additional factors are introduced: ancillary revenue and outlet operating costs.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions. which for the study group.000. car wash. this is likely due to the higher incidence of Group B study markets within this region.000 6.716 .000 4. outlet-based view of retail markets.000.the revenue available for dealer income.000. Ancillary revenues are those derived from non-petroleum sales sources.

000 $150.000 $250.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist. Figure 26: Outlet Revenues.000 vs.000 $200.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. In effect.000 $100. reduced pump prices. $60. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets.profits. A discussion of the ultimate distribution of this revenue is useful. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied. MJ ERVIN & ASSOCIATES 50 .000) $(150. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier. as explained below.000) $(300. Income BC/PR $300.000) $(350. and his personal labour investment.000) $(100.Group B outlets were not as profitable as these revenue values might suggest. which reflects his investment in the outlet. Finding 19: Based on published rack prices.000) $(200.000 per year respectively .000) $(250.$154.000 $50. these ancillary operations contributed to a lower product margin and consequently. Costs. As described above. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets . An examination of these component elements reveals a significant finding: that for most markets. Most markets showed relatively similar net revenues (see Appendix II. Table K). although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue. causing the weighted average for Quebec / Atlantic to be depressed). Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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745 18 446 2.Vancouver population # of brands # of outlets outlets per 10. Vancouver is also a terminal for a refined products pipeline from Edmonton.ex tax Canada Average . Low consolidated net revenues may have contributed to the higher margin. this market has access to numerous refiners along the Pacific coast through marine supply. Vancouver collects a 4 cent per litre municipal tax. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high.542. Figure 28: Vancouver . Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average. ranking 11th. contributing to a higher than average pump price. a 60. Vancouver provides several perspectives into retail marketing. as described below.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . and also has local refining capacity. Influence of other markets: Although relatively close to the US border. The somewhat high margin placed this market slightly above.000 1. but well within a cluster of markets with similar throughputs.000 barrel per day plant located in the greater Vancouver area. Overall.98 ¢ 0. while average throughput ranked 4th. Geographic / Supply / Freight cost considerations: As a port city.968 litres 7. and with access to wholesale product by several means.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 .60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets. net outlet revenues were less than those of other major centres.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.38 ¢ 7. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market.658. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs. This may explain the somewhat elevated gross product margin in this market.

53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. Geographic / Supply / Freight cost considerations:. prices in this market have historically mirrored those of Vancouver. Average outlet throughputs were relatively high.604. Price history / Taxation: Although no specific data is available.000 16. Influence of other markets: Although this market is a border-crossing community. this market is subject to a 4 cent per litre municipal tax. the study data found little to suggest a material effect upon representation. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver. White Rock’s margin was typical of markets with similar outlet throughputs. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors.White Rock population # of brands # of outlets outlets per 10.45 ¢ 7. adjacent to the United States border. Vancouver. Like Vancouver.98 ¢ 0. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip. This is likely due to the fact that unlike many smaller markets. Despite its relatively small size. gasoline “cross-border shopping” is less pronounced than might be expected. but less than most markets with a small population base. Freight costs were accordingly low compared to other small markets in this study. at least in this market. This suggests that.315 4 8 4. and retail gross product margin was less than that of markets with a similar population base. MJ ERVIN & ASSOCIATES 55 . or competitive dynamics.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. thus providing some unique characteristics for the market study. White Rock is essentially part of a major market due to its proximity to Vancouver.630 litres 7. In all respects. due to its proximity to one. the White Rock retail gasoline market displayed the same attributes as a major urban market. This market is close to its usual rack point. prices.

000 710. indicative of a strong competitive climate. Consolidated net revenue: was typical of other major markets in the study group. Influence of other markets: Calgary is fairly remote from US and other major markets.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price . Figure 29: Calgary . Rack-to-outlet freight costs are among the lowest in the study group. which was one reason for selecting Calgary as a study market.47 ¢ 0. pump prices in this market have historically been well below the Canadian 10-city average. Some smaller markets in the vicinity have occasionally priced below Calgary.ex tax Canada Average .extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 .719 litres 6. Calgary had the third highest number of retail brands.827. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics. Calgary is of sufficient size to support a viable rack market. Price history / Taxation: As the figure below shows. Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.Calgary population # of brands # of outlets outlets per 10.675 27 313 4. Product is usually sourced from Edmonton refineries via pipeline.24 ¢ 6. creating some competitive pressures (see Nanton). on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada. Indeed. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. Other considerations: Of the markets studied. Calgary pump prices are very close to the Canadian average.

Consolidated net revenue: was typical of other similar markets. Since 1993. and therefore experiences no particular influences from any other major market. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average. Although no supporting data is available. Figure 30: Regina . Ex-tax prices are also above average.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price . Influence of other markets: Like Calgary. which are among the highest in Canada.180 15 86 4.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. and this market is now more typical of other large population centres. Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity. Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity.089. this market is removed from other significant markets. and a history of volatile pump prices. price volatility has eased. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average. supply/demand is likely more balanced. and is therefore a recognized rack pricing point. margins and throughputs were typical of other markets with a similar population base.21 ¢ 7. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group.Regina population # of brands # of outlets outlets per 10. Regina was of some interest as a study market.50 ¢ 0. it is likely that this reflected a surplus of wholesale inventory within the local market or region.794 litres 7.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets. This is partly due to provincial taxation levels. Since then.ex tax Canada Average .000 179.

23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market. This may reflect a lower than average Consolidated Net Income.790 17 261 4.22 ¢ 7. possibly due to modest ancillary revenue.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. Since then.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 . although. On an ex-tax basis. it is an established rack price point.06 ¢ 0. and therefore experiences no particular influences from any other major market. prices have tended to stay somewhat above the Canadian average. Price history / Taxation: In the early 1990’s this market experienced some price war activity.000 616.265. like most markets of this population density. though somewhat higher than average ex-tax pump prices. Figure 31: Winnipeg . this market is removed from other significant markets. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs. although there is no study data to support this. and has remained very close to the Canadian 10-city average.Winnipeg population # of brands # of outlets outlets per 10. Consolidated net revenue: No ancillary or outlet cost data was available for this market.217 litres 8. probably related to a regional surplus of wholesale inventory (see Regina).Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price . Influence of other markets: Like Calgary. this market has exhibited relatively stable pricing.ex tax Canada Average .

a feature not available to other. Nanton had the second lowest gross product margin of the study group. Unlike many of the smaller markets in this study group. in order to maintain a share of the considerable potential sales revenue that passes through this market. Nanton was perhaps the least viable market in the study group. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market . Margin/Throughput relationship (Figure 24): Like some other small markets in the study group. Nanton has traditionally priced either at or below Calgary.585 4 5 31. Price history / Taxation: In order to attract market share beyond simply the local population. due to its proximity to one. In this respect. While these conditions would normally result in a high gross product margin. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable. would have an offsetting effect.41 ¢ 5.Nanton. Influence of other markets:. Nanton appeared to benchmark its pump prices to those of Calgary. more isolated small-town markets. Due to its highway location and its proximity to Calgary. situated on a major North-South highway to the United States Among the study group. Nanton had a high number of per capita outlets . Nanton was the smallest market in terms of population.000 litres 5. MJ ERVIN & ASSOCIATES 59 .and a low average outlet throughput. although not as low as expected.the highest of the entire group . Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack. and perhaps healthy ancillary sales associated with highway traffic.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. it is likely that low operating costs.000 1. this market has a relatively low freight overhead. while others experience consistently high prices. in terms of expected petroleum revenues. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. Consolidated net revenue: No Ancillary or cost data was available. Alberta population # of brands # of outlets outlets per 10.600.91 ¢ 0. Despite its small size.far in excess of what would be expected of a community with a population of 1. as Figure 24 shows. Average outlet throughputs were relatively low. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices.071. placing Nanton well below the expected margin. the Nanton retail gasoline market displayed the same price attributes as a major urban market. the retail gasoline market in Nanton was not restricted to the local population.

its normal rack point. nor is it influenced by.6 ¢ 10. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. and was accordingly chosen as a study market. experiencing relatively high gross product margin and consequently. they were comparable to other markets with similar average throughputs. Peace River also experiences high freight costs. high pump prices. the community of Peace River is subjected to a number of factors which give rise to higher than average prices.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. though fairly typical of many smaller. Alberta population # of brands # of outlets outlets per 10. Supply is via tanker truck from Edmonton.715 6 8 11. Price history / Taxation: Peace River is typical of small. Peace River has among the highest freight cost in the study group.45 ¢ 1. Geographic / Supply / Freight cost considerations: At 1.157.000 6.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply.Peace River. and due to its isolated locale in northern Alberta. further adding to overall high pump prices. other markets.6 cents per litre. this market has little or no influence upon.623 litres 12. In contrast to Nanton. MJ ERVIN & ASSOCIATES 60 . isolated markets. and in fact fell into a tight cluster of four other study markets. isolated markets. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high.

A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. high pump prices. Thompson is among the highest freight costs in the study group. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with.1 ¢ 3. thereby creating the potential for narrower margins. and due to its isolated locale in northern Manitoba. a significant portion of which would likely be distributed towards supplier overhead costs.Thompson. its usual rack point. Supply is via tanker truck from Winnipeg. experiencing relatively high gross product margin and consequently.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. Geographic / Supply / Freight cost considerations: At 3. Although outlets in Thompson appear to be as competitive as those of any other study market. Price history / Taxation: Thompson was typical of small. and reduced pump prices.000 14. other markets.520 litres 14. Although ancillary revenues were the smallest of the study group.014. isolated markets. this market has little or no influence upon. Manitoba population # of brands # of outlets outlets per 10. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. Thompson is faced with the dilemma.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. and in fact fell into a tight cluster of four other study markets. nor is it influenced by. resulting in per-outlet petroleum revenues which were quite typical of many markets. MJ ERVIN & ASSOCIATES 61 . It also experienced high freight costs. Influence of other markets: Since is not located on a major inter-uban thoroughfare. This however. outlet costs were also modest typical of most smaller markets. they were comparable to other markets with similar average throughputs. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. These factors resulted in relatively strong per-outlet net revenues. remote market.02 cents per litre. further adding to overall high pump prices. Other considerations: Like other small markets. the community of Thompson clearly falls into the category of a small.02 ¢ 11. Consolidated net revenue: Low outlet throughputs were offset by higher margins.975 5 6 4.

06 cents per litre. thus there exists a climate of robust competition.775 30 546 2.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5. On an ex-tax basis however. and first in average throughput per outlet. This is likely offset by high operating costs. With an average “blended” gross product margin of only 3. In addition. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. and a resultant low consolidated net revenue. it is likely that outlet ancillary revenues are among the highest in the country.000 2. this market ranked first in a number of measures: lowest gross product margin. and is also relatively close to wholesale supply sources in the US. Influence of other markets: This market is continuously linked with several other major retail markets.478 litres 3.extax Toronto Posted Price . Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres. It consequently has a low freight component.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average . Within this region are thousands of retail outlets.Toronto population # of brands # of outlets outlets per 10. New York. Figure 32: Toronto . least number of outlets per capita.06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 . Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput. Consolidated net revenue: Although no study data was available for this market. Margin/Throughput relationship (Figure 24): This market stood apart from the study group. as evidenced by an exceptionally low gross product margin.275.3 ¢ 3. it had the second highest brand variety of the study group. this market was consistently less than the 10-city average.098. similar to that of Montreal.36 ¢ 0. stretching from Pickering to Buffalo.

margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics.948 litres 5. several smaller. slightly lower that expected. Although petroleum revenues were typical of major markets. ancillary revenue was slightly lower than average.Ottawa population # of brands # of outlets outlets per 10.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4. Consolidated net revenue: was low. Other considerations: While pump prices in this market were somewhat higher than in Toronto.97 ¢ 0. freight costs within this market were quite low.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets.000 678.004. Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis.ex tax Canada Average . Influence of other markets: Although Ottawa is the only major market in the immediate area. exhibiting all of the characteristics of robust competition. and close to the Canadian 10-city average. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point. rural markets co-exist in this area. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics. some of which have on occasion priced below Ottawa (see Nanton and Calgary).145 19 209 3.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . and operating costs were higher than most.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price . Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin.29 ¢ 5. in fact. Figure 33: Ottawa .

95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Influence of other markets: This market is close to a US border market.Sault Ste Marie population # of brands # of outlets outlets per 10. average throughputs were modest. and accordingly. This would suggest that a significant market share is being lost across the US border. MJ ERVIN & ASSOCIATES 64 .550 litres 8. somewhat isolated. yet with some potential for cross-border retail competition. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets.465.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply. Pump prices in this market were thus typical of any market with similar throughput characteristics. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput. Sault Ste Marie is a sizable market. this Canadian market has some difficulty in remaining both competitive and viable.73 ¢ 1. and between 5 to 8 cent per litre in gross product margin. a consequence of the transport distance from the rack point. partly due to higher freight costs.000 81. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group.475 10 24 2. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto).22 ¢ 7. Freight costs are therefore high. a product of relatively strong net petroleum revenues combined with lower than average operating costs.

despite its high prices. brands.Sioux Lookout population # of brands # of outlets outlets per 10. MJ ERVIN & ASSOCIATES 65 . Influence of other markets: This is clearly an isolated market. so that virtually all sales volume represents local demand only. in fact the second highest in the study group.2 ¢ 11. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. and outlet throughputs of any market studied.96 ¢ 3. one-seventh the average throughput in Toronto. It therefore presents some unique characteristics for the market study.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group.000 3.310 3 3 9. although high. This would suggest that. and had the least number of outlets. Freight costs are therefore high. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. with little or no influence from other retail gasoline markets. Consolidated net revenue: No data was available for this market.066 litres 14. largely due to higher freight costs. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. Sioux Lookout is well-removed from any major highway. This is a major factor in the high cost of gasoline in this market. was much less than expected for a market of this size. this market experiences a high degree of price competition. An average outlet in Sioux Lookout pumped only 694.006 litres in 1995.

pump prices in Montreal have generally been at or below the 10-city average for major markets. and is also relatively close to wholesale supply sources in the US. On an ex-tax basis however. this market interacts with several other markets in the region. Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 . an additional tax of 1.5 cents per litre was introduced into the Montreal area). This market had the highest tax content of the study group due to high provincial tax rates (in 1996.000 1. pump prices in this market have a tendency to be volatile.775. Figure 34: Montreal . placed Montreal lowest of all study markets in terms of consolidated net revenue. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes. with resultant low average outlet throughputs.extax Montreal Posted Price . Montreal was included in the selected market study. With 32 competing brands.3 ¢ 5. a function of a competitive rack market and an excess of retail outlets competing for market share.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average .43 ¢ 0. Influence of other markets: Like Toronto. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. It therefore represents a highly competitive rack market. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity.394. Price history / Taxation: As the figure shows.Montreal population # of brands # of outlets outlets per 10.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region. this market ranks first of the study group in terms of brand variety.870 32 866 4. combined with low petroleum revenues and high operating costs. This.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.144 litres 5. thus promoting a competitive climate.

Chicoutimi population # of brands # of outlets outlets per 10.75 cents per litre. Freight costs are therefore somewhat high. for example). this market has little potential as a rack market. Margin/Throughput relationship (Figure 24): Outlet throughputs. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. this amounted to a reduction of 5. Nevertheless. although low. were quite typical of markets with similar populations.28 ¢ 1.08 ¢ 11. a partial factor in the high cost of gasoline in this market.000 120. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John. Chicoutimi is normally supplied from the Quebec city rack.605 14 97 8.289 litres 12.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. In the case of Chicoutimi.250. yet is geographically quite isolated. MJ ERVIN & ASSOCIATES 67 . Consolidated net revenue: was average among the study group.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base. Gross product margin was accordingly high. by tank truck. within a cluster of other markets with similar attributes. but as the figure shows. but is quite isolated from any other markets. both pump and ex-tax prices in this market were higher than average. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base.

so that virtually all sales volume represents local demand only. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. a product of high freight costs and gross product margins.17 gross product margin the highest of the study group. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack. This is a major factor in the high cost of gasoline in this market. in the case. Gaspé is well-removed from any major highway. Nevertheless.50 ¢ 3.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market. Influence of other markets: This is clearly an isolated market. by tank truck.33 ¢ 14. located at a considerable distance from its rack source of supply.900 litres 17.400 6 13 4.000 16. in fact the highest in the study group. with little or no influence from other retail gasoline markets. Nevertheless.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. a key factor contributing to its 14. Freight costs are therefore high. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. amounting to a reduction of 5. ancillary revenues would likely be modest. this margin was only slightly higher than expected for a market with these throughput attributes. both pump and extax prices in this market were higher than average.Gaspé population # of brands # of outlets outlets per 10. Although operating costs are likely to be low in a small market like Gaspé. Consolidated net revenue: No data was available for this market.75 cents per litre. MJ ERVIN & ASSOCIATES 68 .

095. retail pump prices are ultimately a reflection of rack prices. Consolidated net revenue: was average for the study group. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets. it is an established rack point. posted pump prices in the Saint John market have closely followed the 10-city average.000 74.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada. do not differ markedly from any other rack point in the study group. Nevertheless. Average gross product margin was consequently high. In fact.27 ¢ 9. and therefore.extax MJ ERVIN & ASSOCIATES 69 . which for Saint John. Accordingly. Since provincial taxes are among the lowest in the country. this market fell within the expected range of gross product margins as a function of outlet throughput. and is capable of shipping and receiving wholesale product through marine facilities.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. resulting in lower than expected average outlet throughputs.970 9 56 7. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner. reflected in the high ex-tax pump price. Price history / Taxation: Historically. with or without a local refinery. the Saint John retail market is relatively isolated from other retail markets of any significance. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor. Saint John presents some unique characteristics for the market study. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals.79 ¢ 0.Saint John NB population # of brands # of outlets outlets per 10. freight costs in this market are low. Figure 35: Saint John NB . That a major refinery resides in this market might suggest that these prices should be among the least in the country. ex-tax prices were relatively high.694 litres 9.ex tax Canada Average .Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price .

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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... 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels................................ particularly in comparisons of major urban markets to small... these ancillary operations contributed to a lower product margin and consequently... 71 MJ ERVIN & ASSOCIATES 73 ................. 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness......... 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US.....Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products....... .. 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes........... given the possibility of discounts from posted rack prices and potentially lower overhead costs.... the profitability of the 481 outlets studied appears only marginal................. are principally a reflection of changes in the underlying price of crude oil................................ ........ the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre............................ and likely a negative impact on consumers............. 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs........................................ The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations... In effect.................... after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements.......... the residual represented a net loss to the supplier................................... which ensures a competitive product price for buyer and seller alike............ Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads. ................................................. ................ .............................. 33 Finding 13: From 1991 to 1996............................. 50 Finding 20: For the 481 individual outlets studied.................... residuals for outlets not studied may be better.... 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences............. ............. which in turn...... 48 Finding 19: Based on published rack prices.............................. a feature of most market-regulated commerce............................................... when compared on an ex-tax basis........ remote population centres......................... reduced pump prices........ The viability of the Canadian retail gasoline sector as a whole may be somewhat better.......... while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre...51 Finding 21: Based on published rack prices and the individual outlet data.. petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied. 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences......... while those with high Gross Product Margins tend to have low outlet throughputs...........................

This has not simply been a result of a decline in underlying raw materials costs. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. is mistaken. when taxes were excluded (Finding 14). • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. the very margins within which this industry operates has.Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. place. Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. On a national level. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. In comparing several diverse markets. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. and promotions are the other three). which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . Rack and pump prices are determined in competitive marketplaces. was shown to be strongly competitive: • A long-term decline in pump prices. over the long term. was observed (Finding 10). The study presents such a model. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. when measured in constant and nominal dollars. As described in this study however. by all objective measures available to this study. in comparing Canada average (city) pump prices to those of the United States. price is but one of four competitiveness “tools” available to marketers (product. Virtually all of the competitiveness indicators examined in this study relate to price. exhibited a diminishing trend (Finding 13). 2. The resultant margins. The Canadian retail petroleum products industry. 1. each with unique dynamics. Canadian prices have been at or below US prices in recent years. a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). Although an objective measure of competitiveness is elusive. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline.

the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). an exercise that consumers are unlikely to engage in. since this is the effective range of consumer choice. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. Due to the localized nature of competition in the retail gasoline marketing sector. generally do not serve as competitiveness inhibitors. refiner margins accounted for 5. but even in such cases. and are a predominant cause of inter-regional pump price differences (Finding 16). 3. rack price and freight cost. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. demand and other competitive factors existing at the time. municipal levels of government. taxation as an element of public policy is an area worthy of additional research. provincial. This implies that the competitive dynamics pertaining to these retail markets can.3 cents or 9 percent (Finding 5). measured against the average outlet throughput for that market. well over half of all outlets in Canada operate as lessees or independents. and in some markets. for example) were rationalized. it is important to understand that. and product margins accounted for 3. but given its magnitude. Dealers were shown to have a variety of relationships with their supplier. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. and in some markets. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. particularly smaller ones. retail petroleum markets are considered local (municipal) in scope. This would entail the tracking of not only pump price. Taxation is a significant factor in the price of retail gasoline. By contrast.5 cents. MJ ERVIN & ASSOCIATES 75 . are thus a reflection of the state of product supply. The latter two can vary considerably from one market to another. While some markets. presents a competitive disadvantage to Canadian marketers. and do. these markets have managed to sustain a certain level of viability and competitiveness. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). The demonstrated exception to this is in markets directly adjacent to nearby US markets. and accordingly. but also rack prices and outlet performance. or even between Canadian markets with differing tax structures. experienced higher than average pump prices. Petroleum product taxes are levied at the federal. when the “outside” factors (tax. taxation differences between Canadian and US markets. In applying such a model to the retail petroleum marketing industry. crude costs accounted for roughly 34 percent (Finding 2). vary considerably from one population centre to another.even negative values. or 6 percent (Finding 6) of the 1996 average regular pump price. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market.

showed a close relationship to underlying crude prices (Finding 11). when distributed these three ways (Finding 20). is available to provide for all retail marketing operations including outlet costs. and a loss in the case of urban markets. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. Retail gasoline marketing revenues. second only to the United States. reflecting consumer demand behavior (Finding 15). exhibited competitive traits typical of any of the study markets. predictable seasonal pattern. Viewed from this perspective. and more price-stable markets such as Sioux Lookout. This margin represents gross revenue (after wholesale product and freight cost) which. fluctuating prices are a strong competitiveness indicator (Finding 7). 4. 5. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. The pump price/margin model shows that in 1996. Rack prices were shown to not significantly differ between major centres. Demand for gasoline was shown to vary significantly according to the time of year. the absence of price war activity does not imply a lack of competitiveness. supplier costs and profitability.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. This consolidated outlet revenue. which in turn. on the basis of price fluctuation alone. Sioux Lookout.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). which in turn is the principal driver of ex-tax pump prices. in a highly distinct. incorporated with ancillary revenues and outlet costs. a price-stable market. MJ ERVIN & ASSOCIATES 76 . when examined on the margin-volume model. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. Retail pump prices showed a corresponding seasonal pattern. Pump price fluctuations can be an indicator of competition in the marketplace. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. the Canadian retail marketing sector realized an average gross margin of 3. dealer income. which represent the majority of Canada’s population base. on a per litre basis. Retail pump price changes showed a close relationship to underlying rack prices. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. In fact. constitute a small portion of the retail pump price. While price wars are undoubtedly an indicator of competitiveness.

this industry sector would have realized profits of unprecedented proportions. crude costs. and in turn. Industry profitability is extremely sensitive to very small changes in pump price. despite the predisposition of many observers to use them as such. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. despite increases in tax content and crude costs (Finding 12). and the associated industry initiatives which are ongoing in nature. Both the downward trend in margins. most outlets used in the 19-market study represent major integrated oil companies.6. but to increases in underlying rack prices. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. Since 1991. 7. Thus. Nevertheless. Also. have caused. several competitive strategies. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. based upon an assumed posted rack price. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. intense competitive pressures in the downstream industry in general. assuming all other costs were unchanged. including: • • • improving production efficiency through refinery plant rationalizations (closures). pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. and have resulted from. MJ ERVIN & ASSOCIATES 77 . improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). not excessive profits. if Canadian average pump prices were only one cent higher than they were in 1995. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. Also. both of which are beyond the direct influence of Canada’s oil companies. Thus. This trend has both resulted in. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. Indeed. and the marketing sector in particular. While these economics might appear to place this industry in a position of poor viability. serve as perhaps the most significant indicators of competitiveness in the downstream industry. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. in the long term these fluctuations are likely more reflective of market restorations. and has been a result of. not price. Declining refiner and marketing margins. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. these findings clearly show that pump price increases are ultimately linked not to increased profits.

according to the margin-volume model. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). The costs of most consumer goods in smaller. there are three points to consider: • In very small markets. which should. and this study showed that gasoline prices were no exception. This created some economic pressure to sell product at a higher pump price. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. although this study provides comprehensive evidence of this. MJ ERVIN & ASSOCIATES 78 . likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. it would seem that if local government in smaller markets were interested in lowering pump prices. 9. poor outlet throughputs were generally the predominant factor. Outlet throughput is a key determinant of inter-market pump price differences. When these margins were compared to their corresponding outlet throughputs. the solution would be to encourage some dealers to exit the market. thereby improving petroleum volumes and ancillary revenues at the remaining sites. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres.8.5 million fewer litres of gasoline than a group A (major centre) station. A wide range of petroleum gross product margins were evident within the 19market study group. While competitiveness in most smaller markets was shown to be as active as in larger centres. • • At first glance. That such a relationship should exist was not surprising. other factors exist which contribute to relatively high margins and prices. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. more isolated markets are generally higher than in larger centres. virtually all of the 19 study markets exhibited similar levels of competition. Although some smaller markets appeared to have higher gross product margins than larger markets. isolated markets face particular challenges: although found to be highly competitive. Smaller. had petroleum margins which were commensurate with average outlet throughput for that market. When plotted against the margin-volume model. In suggesting this approach however. reduce pump prices. average pump prices were relatively high. Thus. which could actually inhibit competition. most markets. regardless of size. reducing the number of outlets may also reduce the number of competitors. in order to generate sufficient revenue to cover the outlet’s fixed operating costs.

Charlottetown. 10. under the current PEI regulatory structure. Convenience store. and the perceived effect on their markets. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. Also. 11. MJ ERVIN & ASSOCIATES 79 . and as such. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). A full analysis of the various features of the Nova Scotia and PEI regulatory structures. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector.• A full-serve retail gasoline outlet typically employs 3-5 staff. The historical record is clear however: since deregulating pump prices. does not appear to benefit in consumer terms. the Halifax market. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. in order to build upon the findings in this study towards a full understanding of the dynamics at work. and in turn. the degree of price competition in the retail petroleum has in effect. The federal Competition Bureau for example. is well beyond the scope of this study. many national and local environmental regulations exist for good cause. has seen a decline in pump prices relative to other Canadian markets. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. car wash. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. and the traditional automotive service bay. as marketers find even more innovative ways to attract market share. As these findings show. The loss of employment represented by a station closure may be of some concern to smaller communities. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. will likely preserve a highly competitive petroleum market. This competition then. Retail ancillary operations are a critical element of petroleum price competition. characterized by narrow product margins and relatively flat pump prices. is viewed as an agency which exists to the benefit of industry and consumer alike. and likely others in Nova Scotia. depressed petroleum revenues below that of outlet operating costs. are an acceptable limitation on pure competition (Finding 8). is both the cause and consequence of increased activity in ancillary operations.

2. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. not inhibit. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. A regular comprehensive competitiveness evaluation. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. This should be in the form of a quarterly summary of price trends and related measurements. direct regulatory interventions may have an adverse effect on competitiveness. 1. possibly to the detriment of the consumer. that where a healthy competitive climate exists. Improve public understanding and awareness of competition in the petroleum marketing sector. Public perception measurement. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. in a simple format designed for consumers and legislators. and the nature of competitiveness influences. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. margins and competitiveness factors. as it does in the Canadian petroleum marketing sector. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . Develop cooperative industry research into marketing sector competitiveness issues. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness.This study proposes rather. and the converse image held in much of the public domain. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. petroleum marketing competitiveness.

MJ ERVIN & ASSOCIATES 81 . and issues/opportunities facing such markets.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. along the lines of the model used in this study. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. and in particular. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. by industry. consumers. using Canadian and foreign selected markets. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. using Canadian and foreign selected markets. • • • • * * * Better understanding of this industry. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. using Canadian and foreign selected markets. and regulators alike.

Appendices MJ ERVIN & ASSOCIATES 82 .

car wash. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. Grade Differential . currently established at 10¢ per litre.I Glossary of Terms Ancillary service . generally expressed in cents per litre. service bays. There are several modes (see below) of dealer operation.Canadian Petroleum Products Institute.a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. Lessee . Margin .a service provided in addition to the basic retail petroleum sales operation. etc. independent dealers..the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline. and therefore purchases its supply of petroleum product from an outside source. such as a retail gasoline outlet. Downstream . the regular unleaded pump price.. These product taxes include Excise tax. health. Dealer . an association of petroleum refiners and marketers. and included in the retail pump price. GST.the difference in pump price between a premium or mid-grade of gasoline vs. for example. Distribution Costs . Usually expressed on a per-unit basis. of transporting petroleum product from the rack point to the final point of sale. Integrated Oil Company . MJ ERVIN & ASSOCIATES 83 . and commission dealers.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers.a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier. but inclusive of any corporate taxes on earnings. CPPI .an organization who sells refined petroleum products to end-use consumers. such as lessees. such as a major oil company or regional refiner/marketer. provincial pump tax. municipal tax levees.the retail price of gasoline that would be displayed if all product taxes were removed. The ex-tax pump price is exclusive of these taxes. Excise Tax . such as convenience goods.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces.a generic term referring to a retail outlet operator. Ex-tax Pump Price . diesel. lubricants. in cents per litre. which serves as the voice of the petroleum products industry in Canada on environment.the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived. safety and business issues. Independent Petroleum Marketer .a petroleum marketer who is not involved in the refining of petroleum products.(for the purpose of this study) the cost. Major Oil Company . Marketer . and in some regions. etc.

Petroleum Communication Foundation.the point at which title to refined product is transferred from the refiner to the supplier. it is usually based on the market-driven rack price. Refiner .a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces. Rack Point . Upstream . PCF . is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products. lessee. an association of upstream and downstream oil companies and related organizations. In the retail gasoline sector. or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. Rack Price . manufactures (from crude oil) a range of petroleum products suitable for consumer use. and independent dealer.Mode .the type of contractual relationship between the supplier and the dealer (outlet operator).an organization who. Transfer Price . This may be at a refinery loading terminal. MJ ERVIN & ASSOCIATES 84 . with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. usually per month or per year.within the context of retail gasoline marketing. these can be broadly classified as company operated.the volume (ie: in litres) of petroleum sold at a retail outlet in a given period.the wholesale price posted at the rack point. Throughput . the raw material from which petroleum products are manufactured. commission dealer. Supplier .the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. Regional Refiner/Marketer . Although in theory the transfer price could be set at any arbitrary value. the supplier has initial title to the petroleum product as it leaves the rack point.the segment of the oil industry involved in the exploration and/or production of crude oil.

3 125.1 151.3 141.3 160.7 132.9 1993 130.0 115. MJ ERVIN & ASSOCIATES 85 .9 108.5 112.1 1990 119.3 115.1 48.6 51.9 155.1 115.7 118.1 117.9 1994 130.0 97.1 126. Nominal (¢/litre) (2) RUL Annual Price.8 108.2 45. Nominal (¢/litre) (2) RUL Ex-tax Price.8 93.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.0 1988 108.5 100.9 122.4 134.8 104.8 47. No.1 120.0 32.4 124.2 20.3 55.0 93.7 96.0 102.3 132.2 30.7 22.1 104.4 97.4 57.2 99.8 1987 104.9 26.4 34.7 30.3 96.1 144.5 111.1 26.1 146.1 104. using a weighted (by provincial gasoline demand) 10 city average.4 53.7 123.5 94.2 49.3 58.5 124.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.6 107.3 139.9 1995 133.3 40.3 134.0 1991 126. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.1 167. 62-010: Consumer Prices and Price Indexes. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.8 28.5 30.7 95. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.1 40.0 19.2 92.4 122.4 104.2 142.4 152.6 133.9 97.3 119.4 45.8 94.7 122.6 92.5 126.8 130.0 30.1 105.1 97.6 122.5 145.0 104.6 136.3 1992 128.8 95. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.4 120.4 27.8 106.1 103.0 111.4 110.7 124.3 122.3 151.5 25.4 136.2 45.2 39.2 109.3 1989 114.6 91.8 135.0 135.7 54.9 115.8 132.2 112.5 49.2 50.4 29.1 87.1 117.5 120.9 26.2 31.0 42.2 127.0 93.5 115.3 19.9 118.3 52.2 133.3 27.1 120.7 29.2 121.4 104.

0 7.2 7.0 26.4 13.2 56.1 16.6 26.2 27.1 24.2 23.1 13.1 16.2 63.1 53.7 6.4 26.5 25.9 7.0 16.8 26.8 14.5 28.6 4.7 34.6 23.2 6.6 13.9 54.0 24.6 26.4 13.8 53.Table B: Key Price / Margin History .9 31.4 15.7 29.7 33.6 23.7 23.5 22.9 25.8 16.1 23.0 10.0 55.9 22.5 8.3 13.7 32.1 17.6 18.3 12.9 55.4 53.9 55.2 23.3 13.0 16.8 8.7 14.0 16.8 9.4 14.0 8.7 4.2 7.1 29.0 22.4 30.9 53.9 25.3 42.6 13.2 14.4 32.3 25.2 27.3 26.7 18.9 26.0 33.8 14.5 32.3 26.8 33.5 23.2 13.8 21.0 13.1 16.4 31.2 5.2 8.3 22.6 54.0 14.0 25.0 24.7 14.3 57.2 16.2 14.5 10.3 23.1 18.9 4.9 11.0 25.6 7.5 6.9 23.1 23.9 56.6 21.3 13.9 6.6 26.6 54.2 26.0 24.9 25.7 24.2 25.1 22.3 6.2 15.6 25.5 26.9 30.5 7.9 23.8 23.1 13.2 65.3 6.6 8.5 15.9 14.9 21.8 21.0 15.4 21.2 27.4 MJ ERVIN & ASSOCIATES 86 .7 63.8 53.3 5.7 14.2 13.7 29.1 19.0 24.1 39.2 4.6 25.7 14.5 23.8 11.3 54.3 24.4 29.1 25.6 24.5 33.4 7.7 4.3 22.5 7.6 28.5 14.2 21.8 28.4 33.7 7.6 52.1 5.0 24.2 24.2 13.7 14.8 24.7 7.5 54.7 25.0 26.5 5.8 55.5 23.8 8.3 17.5 30.1 7.8 25.5 35.8 29.2 12.8 14.7 12.9 12.3 56.0 28.2 7.0 7.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.3 66.8 13.2 13.3 13.0 24.2 25.3 9.9 6.9 24.5 57.5 26.1 16.5 14.2 7.9 14.8 15.8 23.4 14.7 29.4 9.0 54.7 58.7 39.7 13.7 31.9 8.9 15.2 41.4 26.0 4.3 58.9 53.4 58.9 25.7 4.5 27.7 19.8 30.4 56.4 24.4 31.8 55.4 12.8 57.2 6.0 52.5 19.4 8.0 9.0 7.5 31.7 18.1 53.1 21.6 5.5 11.7 7.0 12.4 20.9 56.7 8.4 14.9 7.1 52.6 6.2 16.4 22.2 29.4 14.5 27.4 24.3 Tax Content 23.7 Downstream Margin 14.0 24.5 16.9 26.7 15.0 5.1 13.1 7.5 10.9 13.8 14.3 54.3 54.6 20.0 26.3 56.3 14.7 28.7 19.8 22.9 17.4 34.2 26.3 15.4 26.2 11.6 54.3 4.9 23.0 16.1 23.5 56.9 6.1 22.4 57.1 18.9 7.8 26.4 55.9 58.3 15.2 22.0 20.9 4.9 9.1 9.5 Gross Marketing Margin Gross Refiner Margin 53.3 13.6 9.9 25.

7 18.8 25.4 13.3 53.1 15.3 27.2 20.9 29.9 5.3 26.4 26.8 22.2 20.8 20.6 4.1 6.0 5.4 6.4 6.4 6.1 3.1 15.3 8.7 5.5 6.6 53.0 25.7 3.2 27.4 6.7 24.0 28.4 26.3 26.3 21.3 26.5 11.6 19.2 7.9 23.1 6.6 15.4 15.0 25.1 10.0 6.9 4.0 26.0 28.0 9.6 10.4 7.3 26.7 7.5 11.7 51.3 26.8 50.0 28.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .7 24.7 52.3 9.5 5.4 26.0 6.3 9.5 7.2 14.8 23.5 7.6 16.4 51.5 54.1 15.3 6.0 12.2 54.6 53.7 7.6 21.0 24.2 14.0 9.5 21.2 12.5 4.5 14.5 6.5 13.3 58.9 Downstream Margin 12.7 12.2 7.9 9.6 15.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.3 7.9 6.6 12.7 25.1 11.4 25.5 15.7 8.6 20.5 25.3 54.8 6.9 49.5 3.0 11.6 20.7 6.6 5.1 6.3 23.0 54.6 10.3 4.8 49.0 14.9 49.9 3.2 26.1 26.3 26.1 21.5 2.5 23.7 26.1 14.6 11.1 16.2 28.6 27.3 7.1 54.7 25.6 17.7 15.4 28.7 53.7 13.9 19.7 5.3 13.5 17.9 12.7 23.3 28.5 20.5 13.6 4.7 53.2 25.4 4.1 Gross Refiner Margin 7.6 23.1 11.8 23.4 21.9 26.7 16.7 26.0 6.8 17.1 26.8 28.9 14.5 5.8 4.3 25.7 14.3 55.2 25.2 26.3 26.9 28.0 5.1 Tax Content 26.1 14.5 6.0 57.9 12.1 51.1 24.1 11.3 28.8 29.7 3.0 28.5 9.5 21.1 20.8 28.7 14.3 26.5 19.0 14.9 29.4 25.2 15.3 4.6 9.6 3.0 29.9 27.4 16.1 6.5 55.2 49.4 21.7 13.2 9.4 24.0 28.3 26.0 53.1 14.4 11.4 5.2 11.5 3.9 14.7 53.1 11.8 10.3 4.2 23.9 27.1 26.4 26.5 19.9 4.5 53.2 4.0 52.2 26.2 14.3 12.2 4.5 21.8 27.4 32.0 12.1 51.1 57.2 Gross Marketing Margin 4.2 7.1 61.3 9.0 26.9 58.7 6.9 17.3 21.2 5.2 7.0 27.1 55.5 28.7 29.8 52.9 11.

475 2.735.192.1 23.321.998.202.181.455.833 2.361.938.2 21.973.193 3.429 2.262.056 3.801.422.869 2.218 3.878 2.242 2.430.9 30.485 2.853.970 3.966.622.501.027 2.338 3.254.941 2.141 3.516.765 3.823.743 2.294. Demand.045 2.199 2.871 2.047 2.1 16.883.684 2.322 3.191 2.131.479 2.345.9 26.644 3.256 2.565.5 23.254.952.682 3.3 24.748.837.122 2.630.5 27.619 2.4 25.2 27.477.733 2.8 23.411.725.799.970.373.521 2.180 3.279 2.3 23.301 2.615 2.703 2.140.5 22.827 3.443 2.840.5 30.661 Canadian Domestic Gasoline Sales (M3) 2.019.979 3.9 23.070.647.508.798.782 3.884 2.315 2.9 23.9 22.4 24.844.732.1 23.580 3.673 2.101.621.641.1 21.075.450 2.246 2.141.897 2.6 26.322 2.354.2 24.113.015 3.047 3.8 27.403 2.326.841 2.206.132.291.626.897.3 22.853 2.120.813 2.2 20.5 19.688.671.030.379.160 3.281.893.085.804 2.415 2.2 27.313 2.283.378.456 2.9 26.8 22.0 24.2 26.366 2.102.095.254 2.667 2.295.037 2.142.773.152 2.637 3.969 2.587.1 23.201.4 24.7 21.268 2.669.8 MJ ERVIN & ASSOCIATES 88 .889 3.179 3. Inventory.003.193 3.8 23.714.7 18.218.651 2. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.744.299.095 2.544 3.287.6 24.409.801.613 3.9 29.122.612 3.810.518.564 2.900.025.0 20.331 2.666.843.067.324 2.935 3.176 2.979 2.2 29.114 3.3 Canada Avg RUL Rack Price (¢/l) 35.767.8 29.245.7 28.2 27.089.035 2.287 2.5 28.589 3.369.325 2.389.051 3.822.995.1 29.381 2.636.709 2.429 2.298 2.781.642.654.232 3.133 3.039.188 3.1 22.661 Canada Avg ex tax RUL pump price (¢/l) 39.412 2.960.8 33.5 25.161.6 21.9 21.4 22.250.646 2.333.070 3.5 31.299 2.416 2.633 2.029 2.7 24.473.9 23.499 2.930 3.335 2.831.130 3.967 2.6 23.255 3.636.7 29.633.532.480.9 19.775.251.894.8 26.3 22.887.427.968 3.220.164.369 2.Table C: Canadian Supply.970.9 17.7 29.931 3.458.176 3.081.510 3.437.168 2.687.592 2.7 29.930.269 2.045 2.2 22.4 31.934.263.627 2.864 2.270 3.600.490 3.370 2.202 3.437.808.101 2.011 2.509 3.300.682.457 2.609.677 3.2 23.329 3.2 26.045.785.8 30.709 2.346.316.439.620 3.767.818.462.7 24.301.853 3.476.285 2.804 3.377.604 2.182 3.933 3.672.904.710.141.287 2.108.083.301.830.461 3.502 2.874 3.022.716.4 21.566.073 2.748 2.880 Canadian Retail Gasoline Sales (M3) 2.469 4.026 2.322 2.558.3 23.151.886 3.739.7 26.498.625 2.311 3.873.839 2.112 2.297 2.020 2.4 32.8 21.209.002.6 28.859 2.7 34.729.5 27.0 28.281 2.628 3.976.796.7 31.876.2 27.000 3.897 3.180 2.044 2.9 31.802 2.865.130 3.572 2.323 3.2 23.5 32.441.8 28.4 21.3 26.286.180.558.771 3.720 3.097 2.779 2.890.693 3.752 2.932 2.4 29.958.599 2.235 3.

999 3.607.097.671.148.264 2.082.519.2 25.0 25.005 2.112 3.390.537.986.376.8 24.997 2.667 Canadian Domestic Gasoline Sales (M3) 3.9 29.346 2.928 3.382.791 3.4 26.467 2.638 2.155 2.840 2.658. demand.386 3.785.6 20.906.773.068.222 2.649.261.965.442 2.006 3.614.363.317 2.5 source: Statistics Canada (production.037 3.8 21.593.469.077.7 19.601 3.617 2.048.940 2.250.6 20.797.7 21.692.170 Canadian Retail Gasoline Sales (M3) 2.904.799 2.597 2.516 3.0 26.8 28.555.644 3.141 2.660 3.648 3.198.123.796.7 22.936 3.386 3.0 25.994 3.8 20.315.675 2.198.179.415 2.961.426.566 3.703 3.863.2 25.264 2. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .864 2.539.338 2.198 2.606.649.669 2.825.182.480 2.214 2.294 3.204.806.889.857.830 3.324.324 2.714 2.753 3.930.483.370.165.679.344 3.919 2.2 26.0 26.4 20.170 3.9 27.149.1 24.521 2.881.9 22.977.055 2.505 2.656 3.5 25.8 25.130 3.7 Canada Avg RUL Rack Price (¢/l) 20.5 21.4 26.717.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.620.414 3.871 3.984 3.205 2.244 3.1 21.4 25.195.5 21.074.320 3.219 Canada Avg ex tax RUL pump price (¢/l) 27.336.184.0 24.970.

0 61.9 54.5 57.9 57.8 57.3 52.2 62.9 58.0 55.4 56.5 45.0 61.2 59.5 57.0 57.8 55.9 63.8 50.9 49.6 48.5 56.3 59.2 Nanton Peace River Regina 49.6 50.4 52.9 45.4 52.5 60.4 55.6 56.5 51.4 57.8 56.9 59.4 54.5 59.9 62.4 54.2 50.8 48.9 61.8 50.9 58.9 54.1 53.5 58.8 52.2 62.3 52.3 48.5 59.5 59.5 62.2 65.0 59.9 56.7 57.1 56.2 56.3 55.4 54.9 47.9 56.2 51.7 62.7 63.9 61.4 48.5 54.9 64.2 58.7 44.9 64.0 52.5 54.2 51.5 60.1 49.9 52.9 55.2 62.7 52.0 58.9 56.8 41.9 56.6 46.0 54.2 46.9 51.4 55.9 56.2 57.2 55.0 61.6 49.5 60.6 54.7 54.7 51.1 53.9 54.5 57.9 54.9 58.9 56.9 49.9 53.6 46.0 46.2 62.7 52.7 65.0 59.7 46.7 54.5 58.9 50.6 62.5 58.5 61.4 53.8 53.2 50.0 62.5 57.2 54.9 64.8 56.8 64.5 60.5 53.2 50.7 53.5 58.5 51.0 50.5 57.5 59.0 44.0 48.9 MJ ERVIN & ASSOCIATES 90 .2 62.7 53.4 46.8 56.4 56.9 53.0 61.5 59.5 51.1 52.8 56.9 55.8 56.3 49.9 58.5 57.9 49.3 49.9 46.5 51.7 53.4 56.5 57.7 45.1 49.5 56.3 62.9 62.0 61.5 57.6 47.6 54.9 51.8 59.4 55.7 62.1 44.6 58.5 58.9 56.8 54.5 59.6 48.9 56.6 51.3 50.5 53.4 53.9 54.9 53.1 43.6 55.8 52.5 56.4 63.6 48.8 52.8 56.4 61.3 48.8 53.8 47.1 52.2 43.1 41.2 62.7 51.3 61.9 52.0 61.7 65.2 62.8 Thompson 59.9 53.9 51.9 53.4 55.5 59.8 53.9 59.9 64.7 45.1 50.0 Sioux Lookout 62.3 56.9 56.9 53.9 53.2 54.5 58.5 50.3 42.4 55.6 52.9 55.4 46.9 53.9 52.1 49.6 47.4 47.1 44.2 48.5 56.9 52.4 65.5 51.8 52.4 46.8 51.9 57.5 60.9 53.3 52.1 55.4 52.8 48.6 53.7 65.8 45.5 Vancouver 53.5 45.6 44.4 53.9 58.9 47.9 54.9 44.8 47.4 58.6 58.3 51.5 57.9 53.3 54.7 65.9 54.Table D: Pump Price History .Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.2 61.4 Winnipeg 49.4 56.2 65.2 63.9 53.8 48.5 52.4 59.8 44.6 53.4 55.7 54.5 55.9 52.5 47.9 44.5 57.7 50.5 57.8 49.9 56.9 51.7 51.5 55.2 46.6 50.9 55.5 47.5 60.6 55.9 48.5 52.5 58.8 57.8 59.1 60.5 57.2 46.4 57.9 54.5 58.1 55.8 53.7 50.9 61.8 52.0 52.4 58.5 61.3 52.5 58.5 58.1 59.5 58.4 61.3 50.3 55.4 56.4 52.7 48.7 White Rock Calgary 45.5 58.9 64.9 47.9 61.4 49.7 48.5 49.6 47.4 56.9 52.0 62.6 59.0 62.1 50.0 61.5 57.4 61.5 59.9 52.0 39.9 47.9 61.5 46.7 65.7 49.5 53.9 61.2 47.9 56.2 51.8 48.1 55.2 54.3 52.4 52.3 54.7 57.5 56.2 62.5 47.5 59.2 62.4 50.

4 57.6 63.9 57.6 54.6 63.4 52.8 53.8 53.8 49.6 51.5 56.1 51.5 54.6 52.1 55.9 55.9 54.0 51.4 54.1 57.8 53.7 58.8 55.9 63.0 52.7 56.6 50.0 47.3 56.2 55.2 57.6 58.1 Toronto 52.1 57.3 53.7 55.5 54.1 54.8 61.0 50.3 53.9 53.2 57.7 51.8 55.6 49.3 53.0 52.1 55.4 53.8 55.4 57.2 57.2 51.7 57.5 59.6 51.9 56.9 55.5 54.8 54.4 53.5 59.5 54.4 55.5 60.8 55.1 55.6 55.3 53.4 54.0 57.0 53.0 60.0 60.8 55.3 56.6 56.8 63.1 61.0 49.7 56.8 57.5 56.3 52.2 49.9 60.0 48.5 55.6 53.7 52.8 54.6 50.2 Montreal 63.8 52.0 60.8 60.8 60.4 58.7 54.5 52.3 49.1 59.8 55.5 59.3 52.6 55.7 54.7 59.6 52.6 52.4 58.5 54.4 49.0 50.7 52.0 55.6 55.1 56.8 50.0 55.4 60.9 49.6 54.4 45.5 51.6 52.1 53.5 61.9 64.4 54.6 53.2 57.1 61.1 58.2 52.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.4 57.3 54.8 49.7 51.0 56.3 52.8 61.4 54.8 57.7 64.5 MJ ERVIN & ASSOCIATES 91 .3 58.8 Halifax Charlottetown 60.1 54.7 54.9 55.6 53.9 60.7 48.3 62.6 58.9 53.8 54.0 55.1 55.2 Chicoutimi Gaspé Saint John 60.6 52.2 55.3 54.4 57.5 61.2 58.3 56.9 53.6 63.9 49.6 51.9 53.4 52.Table D: Pump Price History .9 55.4 54.7 47.7 52.1 55.0 55.3 54.5 53.0 56.8 47.7 51.4 54.2 57.4 53.1 54.2 57.1 58.6 54.5 51.6 52.2 59.7 49.1 51.4 51.2 57.8 54.7 57.0 59.1 60.9 56.1 53.7 57.2 55.2 53.9 53.8 59.2 54.7 50.6 53.0 53.9 57.4 51.0 57.7 56.2 56.3 54.6 55.4 51.7 58.3 59.6 59.2 52.2 56.7 44.7 46.5 54.6 56.3 57.1 60.9 64.3 61.9 61.3 54.6 52.6 54.7 54.3 55.1 56.3 54.5 57.2 53.9 56.2 56.9 60.0 57.9 54.1 54.5 58.4 58.0 52.1 58.6 Canada Avg 55.3 59.6 59.2 51.1 52.0 55.3 53.7 54.7 56.3 54.2 56.3 59.1 49.0 54.1 53.1 55.4 57.3 51.5 52.5 52.2 58.0 54.2 61.1 53.2 54.7 59.2 56.9 55.6 60.5 55.6 50.5 64.2 53.0 54.9 55.2 54.7 57.9 61.5 56.9 50.9 62.6 56.5 51.6 54.9 58.4 50.9 57.2 56.9 49.5 56.1 52.4 58.3 60.8 50.3 59.1 61.5 63.4 58.3 55.5 57.6 56.2 51.2 55.3 52.6 61.9 61.5 52.6 57.5 53.8 55.0 57.9 55.3 56.2 57.8 57.2 60.2 49.2 52.5 Ottawa 58.0 52.5 48.5 60.4 54.1 53.6 55.9 56.8 56.1 59.9 51.5 51.5 53.8 55.2 54.8 51.1 57.2 55.5 53.3 54.6 54.5 64.7 53.2 49.5 63.9 61.3 56.2 57.3 55.6 54.2 59.2 61.2 55.2 61.2 57.2 58.0 55.6 58.1 54.8 56.0 59.2 49.6 55.0 61.9 55.6 58.2 50.3 49.1 58.6 55.5 67.0 50.7 54.4 55.5 57.9 64.9 58.3 55.0 56.7 56.0 47.0 53.9 49.9 57.0 51.9 55.7 60.7 56.4 57.0 48.3 54.3 55.0 61.2 56.9 52.5 63.8 52.0 58.6 61.4 58.9 55.2 60.5 55.7 53.2 54.5 56.0 52.5 57.3 55.0 52.1 56.4 53.7 57.9 54.5 61.7 48.9 61.5 57.6 58.0 60.7 51.2 56.0 59.6 59.1 51.1 48.0 54.6 49.1 54.4 54.1 52.5 54.8 50.

6 Aug-95 30.7 29.9 27.7 26.7 30.5 29.2 Nov-92 31.7 30.2 Jun-94 31.4 28.1 Apr-95 30.2 24.4 31.0 23.6 30.1 25.1 24.5 24.6 27.2 24.3 Dec-95 Edmonton Regina extax extax 27.4 30.7 Aug-92 24.7 27.7 27.7 28.3 26.7 30.4 31.8 27.3 30.9 26.9 26.1 26.1 28.5 29.9 24.6 22.4 30.4 29.8 27.9 28.9 23.8 26.1 31.1 19.3 21.5 25.3 24.9 23.5 21.3 28.4 29.0 23.3 29.3 28.2 28.3 33.1 25.4 25.5 Nov-95 30.7 28.7 30.0 Apr-92 30.4 Mar-92 28.0 Oct-93 28.4 29.3 28.3 28.8 31.0 Jun-93 26.8 24.4 27.1 27.1 Feb-93 29.8 28.5 27.7 29.5 Jul-95 30.1 20.1 23.7 24.4 29.4 20.9 30.5 28.8 26.9 29.1 24.2 25.9 29.9 25.1 Apr-94 29.5 27.8 29.0 25.0 28.5 27.6 27.3 29.5 23.5 21.3 26.4 31.7 26.4 31.2 Nov-93 27.3 29.6 28.8 27.2 25.8 23.1 28.2 27.0 32.9 30.6 26.3 Feb-95 26.3 30.9 27.8 24.6 21.7 Mar-94 28.9 25.5 29.9 25.4 27.9 20.4 Jun-95 30.2 26.8 25.4 25.6 26.3 29.6 27.7 Winnipeg extax 27.8 Toronto extax 26.8 27.0 24.2 27.4 31.6 26.4 25.6 Mar-93 28.4 26.9 25.4 29.3 26.4 24.0 May-92 28.5 29.7 31.0 23.3 28.7 28.1 30.6 25.0 29.4 31.4 22.4 20.9 Jul-93 28.9 21.1 30.0 26.2 22.6 26.4 29.6 26.Table E: Ex-tax Pump Price History .4 22.1 22.8 29.8 26.6 25.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.8 25.8 24.6 26.8 26.9 24.0 24.8 24.2 32.5 Sep-92 29.5 29.9 30.4 22.6 29.7 Jan-95 27.8 Dec-93 26.7 26.4 24.6 29.6 Jun-92 32.7 26.8 25.6 23.5 24.7 30.9 Aug-93 30.9 25.8 Feb-94 24.0 27.5 Aug-94 28.8 28.5 Oct-92 30.0 26.2 24.7 28.4 23.8 29.8 Jan-94 25.3 Jan-93 30.4 27.6 30.6 23.1 24.2 28.4 20.3 May-94 28.1 Mar-95 29.6 23.8 29.0 May-93 29.9 26.7 Sep-94 32.4 30.4 21.3 30.9 24.1 26.3 29.7 25.0 25.4 23.6 23.4 29.7 29.2 28.3 23.9 28.9 31.3 27.3 30.0 22.0 31.9 26.8 22.3 32.0 26.9 29.7 28.2 29.4 25.3 23.4 30.3 29.3 24.5 26.4 28.7 24.2 23.2 Dec-94 26.1 25.4 23.5 24.7 28.4 MJ ERVIN & ASSOCIATES 92 .3 Jul-92 31.8 27.4 Dec-92 31.0 24.0 23.6 24.3 31.2 Nov-94 29.4 27.9 27.7 29.7 Sep-95 30.6 May-95 29.9 28.8 27.1 25.6 24.6 28.5 27.0 31.6 Sep-93 28.6 26.9 Oct-94 32.0 23.3 29.5 26.4 31.1 22.6 27.4 28.8 28.2 Apr-93 28.2 29.3 27.3 29.4 27.2 26.1 27.0 21.3 29.2 24.6 26.2 28.1 31.2 26.0 25.8 21.5 Feb-92 28.3 24.3 26.6 29.9 28.3 29.5 27.5 Jul-94 29.4 25.0 27.9 24.7 Jan-92 31.9 27.3 26.6 22.9 24.9 21.5 23.6 30.2 26.5 Oct-95 30.6 29.

8 23.2 26.4 36.0 23.9 27.5 36.6 24.6 34.0 26.9 28.1 29.9 32.8 25.7 30.6 Charlottetown extax 36.4 25.1 28.7 34.3 29.0 28.7 27.9 29.9 27.5 24.5 28.4 32.1 24.3 29.7 28.3 25.2 32.9 32.2 27.9 30.5 33.5 28.6 26.3 25.7 27.5 24.8 30.2 25.1 29.2 33.4 33.9 27.4 21.8 32.0 25.6 26.0 33.6 32.8 28.2 27.0 33.2 25.3 35.3 26.6 25.8 32.8 25.8 26.Table E: Ex-tax Pump Price History .5 31.2 28.0 28.8 29.3 26.3 27.0 28.3 31.7 25.6 25.8 36.4 24.7 26.2 21.5 25.1 23.1 25.4 26.3 33.7 33.8 29.5 34.1 24.9 29.6 28.4 27.9 26.6 31.2 22.0 33.5 25.1 30.5 26.2 30.0 23.8 Canada Avg extax 29.2 26.0 32.1 30.5 28.2 36.3 28.3 31.1 26.6 32.4 25.4 24.9 33.2 32.6 29.2 22.3 27.6 31.5 29.8 30.2 25.5 25.8 30.9 29.3 29.1 Montreal extax 31.8 23.4 33.6 28.3 34.7 32.0 28.5 27.2 27.4 26.5 25.3 31.3 29.6 28.0 34.9 28.9 24.5 30.3 31.9 30.0 26.9 35.8 29.4 34.4 28.3 22.7 24.5 26.4 25.5 33.3 26.7 30.7 32.8 25.7 24.2 26.7 24.9 31.6 23.8 29.2 34.2 22.0 36.0 34.6 32.5 31.7 28.8 23.4 32.7 29.9 27.6 36.9 29.0 29.3 31.5 27.2 29.2 30.1 26.7 28.8 28.9 30.3 28.4 26.5 25.2 23.1 32.6 27.0 29.7 24.1 22.3 28.7 32.9 29.2 28.4 36.4 22.2 26.1 24.3 34.3 28.2 28.2 30.8 28.6 27.8 26.9 29.7 Quebec extax 32.7 26.9 30.4 33.8 26.0 26.6 23.9 32.9 30.4 31.0 36.4 32.1 28.5 28.2 27.6 32.0 25.7 26.8 26.6 22.3 30.1 29.7 29.7 34.2 Saint John Halifax extax extax 34.2 24.3 24.8 28.0 25.0 32.8 25.7 23.6 26.2 22.6 28.6 32.9 32.7 22.4 25.5 25.5 33.2 25.0 29.0 31.7 28.7 27.1 31.3 25.4 33.2 27.0 33.2 33.7 MJ ERVIN & ASSOCIATES 93 .7 23.8 27.7 28.7 26.8 23.5 27.5 30.9 37.1 24.2 27.9 27.8 33.8 28.6 26.1 32.7 27.5 32.2 27.0 30.8 32.9 26.1 32.3 25.1 34.7 26.9 33.7 24.1 34.9 31.7 23.6 27.8 29.8 33.3 28.1 32.0 34.6 33.4 33.2 27.6 33.2 32.8 27.2 36.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.0 33.2 27.6 28.4 28.3 23.6 34.1 34.0 27.3 34.5 30.8 26.8 28.2 24.0 30.6 29.9 29.8 27.3 29.4 31.8 32.2 26.9 26.7 26.5 27.6 36.1 30.9 23.4 31.8 24.0 28.8 27.

7 17.4 21.7 21.4 21.6 19.1 21.9 21.5 18.1 22.2 18.4 22.1 20.7 22.4 22.3 22.4 23.0 20.8 18.3 18.9 22.8 23.8 20.5 21.8 21.7 22.1 23.4 20.2 16.6 25.3 19.2 21.6 20.9 19.1 22.7 22.9 21.6 20.8 19.1 15.8 21.8 20.3 17.2 23.5 21.6 20.8 23.0 23.1 19.4 21.3 19.5 21.2 21.1 21.1 21.3 20.0 23.4 24.3 19.9 23.9 20.2 21.1 24.8 21.0 21.8 22.2 23.7 22.3 23.2 21.2 23.7 18.5 20.2 18.7 22.2 16.9 22.5 24.5 20.3 26.5 20.8 23.9 24.8 23.4 21.5 27.5 22.2 20.3 17.2 22.2 22.8 24.8 19.1 21.9 20.2 21.8 27.4 21.2 21.6 23.0 21.6 23.4 22.3 17.1 21.2 29.7 20.1 20.4 21.1 18.7 22.5 21.5 23.5 21.2 20.7 19.8 20.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.0 21.8 20.7 MJ ERVIN & ASSOCIATES 94 .0 22.0 21.7 22.0 21.4 17.9 22.0 23.8 21.8 22.1 21.0 20.7 21.8 18.4 22.0 19.6 23.4 23.7 20.3 20.8 22.1 20.8 19.3 23.6 20.3 23.9 18.7 23.7 19.9 21.2 19.0 22.5 17.5 22.3 18.5 22.1 19.0 23.7 22.3 21.0 24.3 23.0 19.4 19.2 18.6 25.9 22.1 23.9 18.1 16.4 18.2 21.8 19.1 22.2 20.7 17.8 23.5 24.9 22.1 23.8 Ottawa rack Thunder Bay rack 20.3 22.0 22.6 23.1 21.0 21.3 20.1 20.2 21.4 20.8 21.3 20.6 23.2 20.1 Halifax rack 20.9 21.0 22.8 22.6 19.1 15.3 23.0 19.4 22.1 20.4 21.7 21.2 17.4 22.1 20.7 17.8 23.0 23.9 25.6 20.1 22.5 17.2 23.9 22.6 18.5 17.7 16.1 22.3 21.8 21.5 22.3 19.3 21.5 22.2 22.4 23.5 22.2 19.6 19.7 21.2 20.4 22.2 20.6 23.6 19.8 22.1 22.9 21.9 21.2 Quebec city Montreal rack Toronto rack rack 19.0 23.6 20.9 17.6 20.5 19.5 26.3 24.4 20.5 20.4 21.5 23.0 22.7 21.8 25.5 24.9 18.5 21.2 16.4 15.4 20.5 19.3 23.3 24.5 18.9 23.4 21.3 21.9 20.1 20.3 18.4 22.6 25.4 22.1 19.1 21.0 23.1 22.5 21.4 22.8 23.3 21.8 18.7 23.4 20.0 21.4 21.4 22.4 21.7 20.8 20.2 19.6 21.5 23.9 22.3 22.8 18.3 22.Table F: Rack Prices .7 21.7 22.6 19.1 20.6 19.4 21.4 23.0 23.6 21.8 20.9 18.7 21.3 23.6 22.5 21.4 21.7 18.2 18.2 18.0 22.

5 22.9 20.6 21.8 20.5 21.5 22.7 23.9 21.0 22.3 20.0 21.0 21.6 20.3 23.6 23.2 23.0 23.6 24.2 Edmonton Rack 23.0 23.5 19.3 17.2 20.2 24.7 22.7 21.9 19.9 19.3 17.4 23.0 22.8 22.5 20.6 23.2 21.8 23.9 22.6 22.5 22.9 18.1 23.2 22.6 17.3 21.0 24.5 22.1 21.1 23.6 22.6 20.1 17.5 24.1 23.5 19.2 23.7 21.1 25.5 21.3 21.9 22.5 21.8 22.5 22.8 25.6 21.6 24.5 21.6 21.1 18.4 23.4 21.6 25.8 18.1 21.7 22.5 21.4 22.5 21.1 18.3 23.2 23.2 21.8 22.1 21.0 18.8 20.7 22.3 19.2 22.2 21.7 22.Table F: Rack Prices .4 18.0 24.7 23.4 22.2 22.0 22.7 22.9 21.5 23.3 22.9 22.2 22.1 16.1 23.0 20.4 24.7 19.9 22.7 21.2 24.7 17.1 22.7 21.2 24.1 22.4 23.1 22.4 21.5 19.9 22.7 22.0 23.8 20.5 17.0 23.2 22.4 20.6 23.9 19.7 25.7 21.9 21.7 22.2 23.2 18.8 21.3 23.7 24.8 21.2 20.4 21.9 19.8 22.2 22.1 20.1 19.6 23.3 24.1 22.9 19.0 17.6 21.5 23.5 23.2 21.4 19.9 23.1 23.2 24.9 24.3 23.9 17.9 19.8 22.0 21.0 18.7 18.4 24.6 21.5 18.6 21.0 22.1 23.3 22.2 19.1 23.4 21.3 22.4 21.9 19.1 16.3 21.8 24.6 25.3 24.5 21.5 20.9 22.8 20.1 24.5 24.6 23.5 MJ ERVIN & ASSOCIATES 95 .4 22.0 17.9 22.7 25.7 21.4 24.2 22.0 22.7 21.4 20.3 23.8 24.6 22.1 25.6 19.5 24.5 23.0 25.9 21.1 23.5 21.7 20.3 20.4 22.9 22.6 17.9 20.3 24.5 23.2 20.8 20.2 24.6 22.1 23.7 21.6 20.5 Canada avg rack 22.6 19.1 21.9 23.4 24.4 21.6 23.7 23.9 24.9 18.2 23.3 19.9 23.7 21.9 21.0 20.4 21.3 17.7 21.9 23.6 21.0 20.4 19.7 17.6 23.4 22.2 19.6 21.7 23.5 20.5 19.6 25.2 22.5 21.5 21.0 24.2 23.5 18.7 22.3 23.0 24.6 23.6 20.1 22.1 22.1 21.9 21.9 23.8 23.1 19.6 21.9 21.7 21.5 20.3 18.0 23.1 20.5 23.4 23.5 22.8 21.0 22.7 23.8 19.0 22.9 24.3 20.0 20.8 24.3 23.1 21.7 24.3 20.1 21.3 24.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.0 22.9 20.7 22.9 21.0 21.8 23.9 22.4 21.8 23.0 21.7 21.2 20.5 24.1 21.8 Vancouver Victoria rack rack 24.1 20.6 21.4 25.3 21.7 24.8 22.3 22.7 22.1 23.8 21.5 23.9 23.9 21.2 20.1 25.2 21.

34 63.245 351.60 50.686 273.549 111.832 91.97 63.894 1.22 59.89 61.922 103.00 57.173 568.093.40 58.48 56.214 248.625 64.834 71.837 329.687 1.704.997 397.985 636.945.153 316.056.73 65.516.10 63.42 53.102 98.40 54.72 63.796 2.32 51.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.13 58.38 56.749 243.25 57.897 350.500 378.671 399.94 55.00 66.60 49.24 61.174.65 54.745.30 57.97 51.53 61.414 450.00 48.543 2.204.268 478.03 58.16 59.234 799.620.20 54.246 2.009 54.529 123.101 256.332 101.19 49.220 389.000 63.00 62.101 447.483 63.334.30 63.971 473.508 2.50 55.420.30 52.90 62.628 702.166 102.702.87 61.70 49.53 48.20 61.702 333.90 67.23 53.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.80 64.194.72 74.712 1.475 1.30 68.60 60.83 68.669 203.448.749 91.78 67.460 833.86 56.35 73.07 61.790 185.20 60.19 52.66 50.249.40 63.20 58.85 48.45 63.211 15.412 722.88 64.85 54.052 84.11 58.00 57.50 56.935 758.89 60.36 54.300 578.972 429.238 2.10 59.10 52.557.26 63.98 59.810.636.02 51.50 56.014 3.483 2.18 51.980 120.298 576.933 25.859 240.70 55.895 600.40 59.643 184.45 53.141.000 1. and All Study Markets are weighted (by market population) averages.554 2.830 2.60 70.55 58.150 48.113 2.678.Table G: Study Market Data .698 Note: Regional.796 529.597 2.20 59.621 102.370 41.770 2.92 51.90 63.119 632.018 2.030.72 58.241 451.400 142.26 49.23 63.30 66.614 3.88 54.89 65.30 54. MJ ERVIN & ASSOCIATES 96 .438 591.903 33.30 54.26 44.196 669.10 53.850 126.000 1.058 2.858.93 63.145.17 Diesel 64.905 183.060.811 120.250 748.296 179.192 2.00 67.74 57.513 19.983 1.949 1. Urban.000 217.120 570.890 2.28 65.018.377 30.40 61.

42 24.99 26.07 24.55 28.36 26.83 22.23 23.93 23.45 23.89 25.03 24.51 25.96 24.09 24.83 23.25 27.01 22.90 26.69 23.08 25.56 22.13 23.42 25.33 22.84 28.95 22.35 25.63 25.47 20.31 22.59 22.15 24.15 29.07 24.20 27.07 24.93 27.32 33.43 20.18 25.59 22.07 26.76 25.59 24.03 20.15 27.45 24.64 28.83 24.27 20.97 23.81 21.43 28.92 20.49 21.11 26.63 28.26 27.45 25.81 28.49 31.51 25.38 24.97 22.21 27.91 21.47 27.45 24.88 20.51 20.88 20.23 26.81 27.40 25.89 26.33 21.33 21.45 20.09 27. Tax (by Grade) Rack Pt.33 21.28 23.25 28.04 24.59 28.95 22.97 25.69 27.15 20.95 25.90 27.34 25.73 26.34 20.92 30.98 28.27 29.39 22.74 21. MJ ERVIN & ASSOCIATES 97 .63 21.37 27.50 25.43 20.49 21.78 Product taxes Midgrade Regular 26.20 20.59 28.94 23.59 28.50 20.32 21.65 26.89 28.43 21.26 28.45 29.76 24.43 21.42 27.17 20.88 28.89 29.99 28.45 22.39 Note: Regional.88 28.83 25.39 22.33 22.Rack Price.82 21.75 27.85 28.88 22.45 20.96 24.40 27.63 24.33 27.57 22.75 22. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.47 28.68 Diesel 36.06 28.58 25.41 27.49 25.39 21.23 25.84 28.23 24. Urban.38 24.83 24.03 21.28 22.51 31.Table H: Study Market Data .45 20.02 23.45 20.16 29.93 23.30 29.16 22.25 31.81 25.55 28.53 23.65 21.98 25.42 24.39 21.16 21.33 21.83 24.33 22.82 28.45 29.34 26.92 21.95 Premium 26.65 27.07 26.96 22.54 28.63 26.04 26.01 28.18 28.57 29. and All Study Markets are weighted (by market population) averages.45 28.36 24.41 22.63 20.33 21.73 32.48 25.25 24.87 26.88 22.92 22.08 23.21 27.

85 24.93 56.98 1.82 3.33 .29 24.52 5.35 58.13 0.44 56.99 0.26 27.00 4.79 33.30 12.90 23.17 26.03 28.49 57.49 2.89 0.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.98 31.41 7.41 12.68 7.14 60.22 5.58 1.94 17.56 4.83 27.28 1.38 2.04 0.81 28.45 6.97 0.17 11.53 22.28 27.12 6.01 31.60 14.17 1.77 37.36 0.24 7.16 3.56 24.08 0.21 8.Table J: Study Market Data .38 7.82 95 Retail Gross Product Margin 6.41 29.44 33.89 28.44 25.72 26.07 0.16 20.58 66.01 0.42 2.90 59.50 3.66 28.35 27.13 11.86 28.08 17.25 1.28 1.64 3.04 22.38 0.Blended Prices.033 0.31 23.08 55.31 34.07 30.93 22.28 56.02 22.02 0.51 11.20 14.53 6.57 12.96 3.22 1.08 3.75 28.63 58.30 5.73 22.85 26.60 23. and All Study Markets are weighted (by market population) averages.21 8.77 5.04 28.21 24.68 2.80 9. Urban.52 30.45 1.96 27.10 3.02 13.84 28.24 23.83 1.05 6.80 1.43 0. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.95 21.31 28.68 7.12 23.50 58.04 23. Variance uses the formula [n∑x2 .88 31.26 5.14 7.64 3.94 22.50 10.00 0.91 29.(∑x)2 ]/n2.34 1.81 26.13 28.27 11.73 10. Costs.73 1.83 12.75 23.89 21.76 5.99 2.83 21.18 21.38 22.06 5.71 33.17 9.95 6.39 56.33 9.59 4.34 0.63 60.82 32.27 62.64 1.29 7.86 49.53 21.91 2.98 0.11 26.91 0.91 22.24 7.38 28.03 7.35 60.78 2.88 5.11 31.31 0.77 30.23 38.23 7.22 14.60 7.20 5.18 7.94 Note: Regional.32 31.16 54.96 28.26 3.62 56.85 11.27 60.73 2.50 0.06 0.48 7.29 8.15 66.18 55.43 23. Average Deviation is the average deviation of the market values from their mean (average) value.10 6.47 0.96 25.06 28.92 22. MJ ERVIN & ASSOCIATES 98 .83 36.98 0.85 21.47 58.84 5.79 0.36 20.19 5.00 58.07 0.35 28.70 22.02 3.27 6.64 2.37 26.00 22.54 50.

023 $ (15.067 $ 92.120 $ 54.208) $ (226.934 3.648 3.885.779 $ 121.780 $ 85.526 $ 207.217 2.622 $ 174.071.750 $ 271.Table K: Study Market Data .095. and All Study Markets are weighted (by market population) averages.871) $ (128.000) $ (241.241) $ (227.102 $ 223.794 3.550 $ 177.837 $ 56.295 $ 174.250.467 $ 96.224 $ 189.716 Note: Regional.626 $ 81.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.852) $ 119.066 3.632 $ 256.209 $ 26.564 $ 252.900 2.948 3.900 $ 179.143) $ (249.058.746 $ (374.544 $ 175.542.223.550 694.032 $ 77.646) $ (98.890.630 3. For 95 net retail petroleum revenue.272 $ 210.265.089.098 $ (320.000 2.805.209 $ 82.604.247 4.004.572) $ (286.289 981.557) $ 102. Revenue. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.129 $ 97.855 $ 278.481 $ 96.465.478 4.394.966 3.719 3.956) $ 200.244 95 net retail Ancillary Revenue petroleum revenue $ 208.197.542 $ 222.623 2. and consolidated outlet income these averages are based only on those markets with available data.520 5. these averages are based on all applicable study markets.010 1.772.707 $ 260.677 $ 180.375) $ (49.279 $ 154.640 4.013 $ 227.302 $ 69.332) $ (238.658.272 $ 118. MJ ERVIN & ASSOCIATES 99 .429 $ 238.011.913 $ 139.263 $ 60.135 $ 199.827.Sales.246 $ 118.688 $ 85.995 $ 234.800 $ 225.766) $ (274.074 $ 131.117 $ 207. but for ancillary revenue.367) $ (164.000 $ 156.911) $ (166.866) $ (244.993 $ 113.638 2.068 3.510 $ 60. outlet costs.694 3.502 $ (80) $ 60.098.157. Urban. Outlet Costs.856 3.014.875 $ 255.081 $ 222.144 2.

223 3.97 8.975 2.28 17.180 616.40 9 4.715 14.50 8.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.43 12.13 2 11.60 3.98 6. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.000 pop’n No.89 2 4.41 0.90 13 4.27 1.47 14 3.23 6 7.20 0.33 0.775 678.17 19 9.250 981 2.22 0.06 1 5.30 0.157 2.089 3.265 2.095 3.790 1.745 16.95 3 9.73 5 10.605 16.27 0.55 19 11.29 1.658 3.91 12.08 4 2.827 3. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.60 11 7.80 10 4.79 6.21 0.68 4 7.29 8 7.24 0.88 11 8.73 14.475 3.84 12 5.50 9.Table L: Study Market Data .17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.98 7.41 1.275.098 4. rank* 3.04 15 4.88 12 7.394 2.465 694 3.004 3.22 3.02 0.50 3 10.604 3.52 13 5.071 2.91 17 4.08 16 3.014 5.06 5.Demographic Profiles Population pop’n 299 .06 16 4.775.315 710.53 10 6.870 120.36 5. of Outlets No.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.310 1.38 0.54 6 2.585 6.20 17 14.01 7 2.30 1.76 18 5.058 1.48 7 7.51 9 11. MJ ERVIN & ASSOCIATES 100 .550 1.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.45 14.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”. of Brands No. N refers to study sample size (total = 481). inverse ranking is used (lowest value = 1).40 1 3.45 0.400 74.96 5.42 5 14.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.10 3.89 7.85 15 11.970 330.23 8 31.675 179.08 3.542.00 11.47 7.145 81.845 15.

III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. cardlock. They maintain a large database of historical prices at most major centres. health. generate jobs and growth. 119 . K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . Ottawa ON. safety and business issues. Ottawa ON. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). bulk. accessible through a public fax-back dial-in system. a series of studies whose goal is to strengthen Canada’s competitiveness. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. Ervin. Ottawa ON. and in doing so. Contact: Michael J. Contact: Cindy Christopher. They work with major oil companies in benchmarking performance in the retail. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. Senior Advisor. Vice President Public Affairs Address: 275 Slater Street. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. Contact: Maureen Monaghan Address: 580 Booth Street. Principal Address: #400. The SCF is the basis for this study.14th Street NW Calgary AB.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. aviation and lubricants marketing channels. and provide background resources to industry public affairs managers and the media. Petroleum Products Address: 235 Queen Street. Contact: Brendan Hawley.

Supervisor. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. 101 .ab. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. and is a useful “window” on this industry. Contact: Len Bradley. no 45-004) is a useful source of supply and demand volume data. Executive Director Address: 214.6th Avenue.6th Ave.Octane Magazine Octane is Canada’s refining and marketing trade journal. SW Calgary. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry. Energy Section Address: Statistics Canada. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 .ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. Its monthly publication “Refined Petroleum Products” (cat. Octane is published quarterly. Contact: Robert Curran. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. Contact: Gerard O’Connor. 311 . Managing Editor Address: Suite 2450. Calgary AB. Ottawa ON.

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